What is Banking?
Banking refers to services offered by a bank or some other financial institution. Banks deal primarily with three types of services:
- Deposit Accounts (checking and savings)
- A checking account allows you to deposit or withdraw money easily for short-term spending. On the other hand, savings accounts are generally long-term deposits, which protect and increase your wealth.
- Credit Cards
- Allow you to borrow money to purchase everyday items, but you pay interest on the amount you borrow. You have to make payments every month to avoid fees.
- These include mortgages, auto loans, business loans, and personal loans.
Banks make money primarily by lending money to businesses and individuals. If you take out a loan or open a credit card, the bank makes money by charging you interest on the amount you borrow.
If you have a savings account, you receive interest on the money in your account because banks use your money to fund loans for other people–in this case, you are the lender, and the bank is the borrower–but you can still take money out of your savings account whenever you want.
Why is banking important?
It’s essential to understand and take advantage of banking services, as they offer a variety of benefits:
- Access to credit
- The ability to withdraw funds easily
- Services to help manage money
Safe and sound
A bank is also the safest place to keep your money. Banks are insured by the Federal Deposit Insurance Corporation (FDIC), which insures any money you deposit. Even if the bank loses a loan or runs into trouble financially, your money is safe.
The FDIC insures deposit accounts for a minimum of $250,000 per person, per account type. If you have a checking account, savings account, and a retirement fund at an insured bank, your assets are insured for a minimum of $750,000.
Banks vs. Credit Unions
Both banks and credit unions are financial institutions that provide deposit accounts and lend money.
Credit unions are not-for-profit, cooperative financial organizations that are owned by their members. While they offer most (or all) of the same services as a bank, profits are used to fund projects and services that will benefit members, not to pay CEO bonuses or shareholder dividends. Credit unions can be big or small–from a tiny local credit union for people who live in a certain town to a huge credit union created by a corporation for the benefit of its employees (such as BECU, the Boeing Employees Credit Union).
Using services from either type of institution is still called “banking,” but there are some key differences:
|Stockholder owned||Member owned|
|Anyone can open an account||Membership requirements • State of residence • Employer • Military Service|
|Many fees, monthly service charges||Lower fees, many services free|
Banks and credit unions also differ regarding interest rates. Because credit unions are owned by their members and don’t need to turn a profit for shareholders, they can charge lower interest rates for such things as credit cards, mortgages, and other loans. They also tend to pay higher interest rates on savings accounts for the same reason. In general, credit unions are the cheaper option for most banking services.
- Banks typically offer deposit accounts, credit cards, and loans.
- Using banking services makes money management easier and keeps your money safe.
- Any bank you use should be insured by the FDIC.
- If you meet membership requirements, credit unions offer a great way to get lower interest rates and cheaper services.
Keeping your money under the mattress may seem safe, but banks and credit unions offer many perks that your bed frame just can’t match. With federal insurance of at least $250,000 and many options for borrowing money when you need it, banking services –either through a traditional bank or a credit union–can help keep your financial life on track.
- Founded in 1919, The First Woman’s Bank of Tennessee was the first bank run entirely by women.
- Italian banks take Parmesan cheese as collateral for loans and keep hundreds of thousands of cheese wheels in their own climate-controlled vaults for the two years it takes them to mature.
- In North Carolina, a man held up a bank for $1 so that he could be sent to prison and receive free health care.
- To open vaults at the Bank of England, you need a key that is three feet long.