Personal Finance in Your 20s and 30s: Your Bank Account Options - dummies

Personal Finance in Your 20s and 30s: Your Bank Account Options

By Eric Tyson

No matter what type of bank you choose, make sure you have a firm grasp of the different account options. Doing so requires thinking about your banking needs and what’s important to you and what’s not. The following sections identify how you can protect your moolah with different accounts and access your money when you need it.

Transaction accounts

Whether it’s paying monthly bills or having something in your wallet to make purchases with at retail stores, everyone needs the ability to conduct transactions. Two of the most common types of transaction accounts are checking accounts and credit cards.

Checking accounts

The most fundamental of bank accounts, a checking account enables you to pay bills (by check or electronic payments) and deposit money from your job (including through direct deposit). Interest paid is generally low or nonexistent, and you need to watch out for various fees.

During periods of low interest rates, the fees levied on a transaction account, such as a checking account, should be of greater concern to you than the interest paid on account balances. After all, you shouldn’t be keeping lots of extra cash in a checking account; you have better options for that.

Debit cards are excellent transaction cards. They connect to your checking account, thus eliminating the need for you to carry around excess cash. They carry a Visa or MasterCard logo and are widely accepted by merchants for purchases and for obtaining cash from your checking account. Unlike a credit card, debit cards have no credit feature, so you can’t spend money that you don’t have.

Because of bank regulations, bank customers must give their permission/consent in advance for overdraft protection and the associated fee from a debit-card transaction. (Check and electronic bill payments go through as they always have and can lead to an account being overdrawn.)

However, you can rack up overdraft fees if your bank processes debit-card transactions that lead to your account being overdrawn.

Credit cards

These transaction cards, which are offered by banks with either the Visa or MasterCard logo, enable you to make purchases and pay for them over time if you so choose. (Discover and American Express also offer their own credit cards.)

The credit feature enables you to spend money you don’t have and carry a debt balance from month to month. Notwithstanding the lower short-term interest rates some cards charge to lure new customers, the reality is that borrowing on credit cards is expensive — usually to the tune of about 16 percent. The smart way to use such a card is to pay the bill in full each month and avoid these high interest charges.

Options for getting cash

You need a firm understanding of the different features of the transaction accounts your bank offers so you can easily access your cash. You may think choosing a bank that has a large ATM network is your best option, but think again.

One reason that bank customers have gotten lousy terms on their accounts is that they gravitate toward larger banks and their extensive ATM networks so they can easily get cash when they need it. These ATM networks (and the often-associated bank branches) are costly for banks to maintain. So, you pay higher fees and get lower yields when you’re the customer of a bank with a large ATM network — especially a bank that does tons of advertising.

Do you really need to carry a lot of cash and have access to a large ATM network? Probably not. A debit card is likely the better option for most people since these cards are so widely accepted by retailers and other product and service sellers.

Savings accounts

Savings accounts are accounts for holding spare cash in order to earn some interest. Banks and credit unions generally pay higher interest rates on savings account balances than they do on checking account balances. But savings account interest rates have often lagged behind the rates of the best money market funds offered by mutual fund companies and brokerage firms. Online banking is changing that dynamic, however, and now the best banks and credit unions offer competitive rates on savings accounts.

The virtue of most savings accounts is that you can earn some interest yet have penalty-free access to your money. The investment doesn’t fluctuate in value the way a bond does, and you don’t have early-withdrawal penalties as you do with a certificate of deposit (CD).