Recipes for Financial Fitness

Credit Basics II

Open and Use a Bank Account

Financial institutions provide services that help you manage your money. By using these services, you establish credit.

Every transaction you make at a financial institution provides evidence of how you manage money. An example of a transaction is cashing a check or making a deposit or withdrawal from your savings account. Every lender wants to know how you manage money before approving (or denying) you for a loan or credit card.

Types of Financial Institutions
Two major types of financial institutions include: banks and credit unions. A bank is owned by stockholders; a credit union is owned by customers. Both keep your money safe and secure, offer checking and saving accounts, and can provide you with credit. Anyone can walk up to a bank and open an account. To use a credit union, though, you have to join it. And to join a credit union, you or a family member must work for an employer who is a member.

Why Use a Financial Institution?
Simply stated, using a financial institution’s services helps you to manage your money, keep it safe, and establish credit.

When you deal only in cash, you may be able to effectively manage your money, but cash can be easily lost or stolen. And when it comes to financial institutions, it is hard to establish credit with cash transactions. Why? When you use cash, there is no evidence of money changing hands because there is no record of your financial transactions.

Reasons to Use Financial Institutions

Safety.

Financial institutions keep your money safe from theft, loss, and fire.

Convenience.

You can deposit or withdraw money easily. And with ATMs, you can deposit or withdraw money any hour of the day.

Cost.

You pay fees to use financial institutions, but these fees are much lower than fees charged by check cashing, money order, wire transfer, and payday loan businesses.

Security.

Most banks are insured by the Federal Deposit Insurance Corporation (FDIC). Most credit unions are insured by the National Credit Union Share Insurance Fund (NCUSIF). What does this insurance do for you? If your insured bank or credit union closes, catches on fire, or is robbed, your money will be returned to you, up to $100,000 per account.

Help Establish Credit.

Using financial institution services, such as savings and checking accounts, helps you establish credit in three ways.

Savings and checking accounts. By using these accounts responsibly, you show lenders that you are credit worthy, or worthy of using credit. How?

a.	By saving money. Lenders view regular deposits into savings accounts as a positive money management skill. And it doesn’t matter how much you save. It is the habit of saving that they are more interested in. Lenders view people with a savings account as financially stable. If you have the discipline to save money, they figure, you also have the discipline to pay your bills on time.
b.	By using a checking account. Lenders will review your transactions—deposits, withdrawals, and written checks—as evidence that you can manage your money.

Overdraft protection. This checking account feature is a form of credit. An overdraft is when you write a check for money you do not have in your account, also known as bouncing a check. (You can also use overdraft protection when using your debit card—often, the card is accepted even when you don’t have the money in your account.) With overdraft protection, your financial institution automatically puts money into your checking account to cover the overdraft. You pay a fee for this protection, but it allows you to do two important things:

Demonstrate responsible use of credit if you immediately deposit funds to cover the overdraft.

Protect your credit. How? Bouncing a check is big no-no. Even though bounced checks do not become part of your credit report, they can eventually affect your credit. Say you write a check to your credit card company and it bounces. If you deposit fund to cover that check after 30 days from the due date, your credit card company will report a late payment to the credit reporting agencies. Late payments damage your credit. And records of late payments stay on your credit report for seven years.

Evidence of your financial transactions. This is a very important aspect of establishing credit. Alternative financial institutions, such as check-cashing stores or payday lenders, are not required to report your financial transactions to credit reporting agencies, as financial institutions must do. The credit reporting agencies create summaries of your financial transactions. These summaries, or credit reports, are evidence of your financial transactions. Lenders review your credit report to decide if they want to approve you for a loan or credit card. If you can demonstrate that you can manage your money, you need to make sure you create evidence of doing so. Working with financial institutions assures you of that.