Originally published on Friday, October 7, 2011 at 12:55am
While working for a bank, I received numerous questions through numerous channels, related to how banking really works. Still, I continue to be asked such questions. I figured that now was as good a time as any to share what I know. Though most of my experience comes from one bank in particular, the one I worked for, what you’ll find here are more or less generalizations of the US banking climate as a whole. If you have questions about how banking works, please read this post in it’s entirety. I promise you will find it informative, all be it long.
First, it’s important to point out that banks are not a free service. As a society (particularly in America), we have become acutely accustomed to a myriad of FREE services, from email to online photo storage to social networking and much more. Banks are businesses, and as such, they are in the business to be profitable. How profitable banks are, vs. how profitable they “need to be” or “should be” is a whole other debate that I am absolutely not addressing here.
KNOW YOUR ACCOUNT BALANCE — The one thing I cannot stress enough, is the importance of knowing how much money you have in your account. This can be accomplished in whatever way works best for you, but you actually have to keep track of money going in and out. It is generally best to accomplish this through use of a checking register, which is a running total of your account balance that you calculate after each deposit or withdrawal. Ask for one at your bank, they’re most likely free. Typically, online banking is the best way to get the most accurate picture of your account activity at any given time. Most sites will even show you the holds, including debit card purchases that haven’t cleared yet, so you can get an accurate picture of your balance.
CASHING, DEPOSITING AND YOUR BALANCE — Your “available balance” is not the same thing as your “ledger balance” or “current balance.”
When you cash a check at your bank that’s drawn on an account at a different bank, your bank is going to take a few days to negotiate that check through the other bank. During this time, a hold is placed on your available funds in the amount of the check you’re cashing. If you have $500 in your account at bank “A” and cash a $250 check drawn on bank “B,” your ledger balance is $500, but your available balance is $250 until the check clears. The same is true when you deposit a check from bank “B.” Deposited checks are on hold until the check clears. In most cases, funds are available (holds come off) a day or so after your deposited or cashed check. This is because if the transaction initially checks out, the bank removes the hold on good faith. If something ends up bouncing, those deposited funds can be pulled back later, and yes, banks can do that, even if you’ve already spent the money.
If you’re depositing a check that’s drawn on your bank, have the teller “deposit as cash” by cashing it first, then depositing it as though you handed the teller cash. This makes the deposit available immediately.
“Less-cash” deposits are like doing a deposit of a check, and a cash withdrawal at the same time. The same rules as above apply to holds. When you perform a less-cash transaction, a hold is placed on the account in the amount you’re withdrawing. Consequently, you can only withdraw as much money as is available in your account at the time. You can’t deposit a $500 check into an account that has $10 in it, and expect to get $100 back. Do not try to make a mixed cash/check deposit and also get “less cash.” If you’re depositing $60 in cash along with some checks, don’t indicate that you want $50 back under less-cash. Why would you deposit $60 cash only to withdraw $50 cash? This just net’s a $10 deposit. The teller can give you change for your $10 cash deposit if you hand over a higher denomination.
IDENTIFICATION — When you perform a transaction at a branch that moves or withdraws money, the teller will require valid identification, unless they know you to the extent that they’d be willing to risk their job on you. Valid identification means a driver’s license, state ID, or passport that is not past it’s expiration. Also, it must HAVE an expiration. Bank employees service hundreds of people each day. Don’t expect them to remember you, and even if they do, don’t expect them to be willing to stake their job on you not doing something shady.
OVERDRAFT FEES AND POSTING ORDER — Overdraft fees happen when more money comes out of your account in a day than goes in. Remember that holds apply, as above, which affects your available balance. Overdraft fees are typically $20-$40 per item, depending on your bank, and this is heavily impacted by posting order. The good news is that fees are calculated based on business days. Saturday through Monday are the same business day. If you’re keeping track of things, and realize that you overdrew on Saturday, as long as you can make a CASH deposit to cover the overdraft before end of day on Monday, you’ll be fee free. For weekends with Monday holidays, you’ll have through Tuesday as well.
At the end of each day, all of your transactions that occurred during the day are put into a specific order, regardless of the time of day they took place. This is usually deposits from highest amount to lowest amount, followed by withdrawals from highest amount to lowest amount. The logic here, is that the highest amounts are the important things and should be paid first. This validity of this logic is another thing that I am not addressing here.
What the posting order means, is best illustrated with an example. Lets say you start the day with $1503 in your account. You purchase six sodas throughout the morning, each separately, at $1 each. Later in the afternoon, your mortgage check for $1500 clears your account and leaves you in the negative by $3. Due to the posting order, this results in the six soda purchases being the last items in the list (at the bottom). Three of those overdrew your account for $1 each, and you will likely have three per-item overdraft fees. That’s posting order for you, love it or leave it. By the way, you can’t exactly leave it.
Most overdraft fees are avoidable by properly managing your account. When they’re not, you should be grateful that the important things that day got paid. Again, “fairness” of fees is not something I’m getting into here. I will note, however, that recent regulation changes that allow you “opt out” of overdraft fees on debit card purchases are your friend. Most accounts are “opted out” by default, if you’ve never specified that you want to “opt in.” It’s always best to check with your bank, though. As a result of this regulation, banks have lost an extraordinary chunk of revenue, which is now beginning to be made up elsewhere with additional fees. Again, banks are businesses.
Most banks are willing to rebate a fee or two (or three) if you have a good history with the bank, no overdraft history, and ask nicely. Sometimes, you won’t be able to get a rebate.
DEBIT CARDS — First, your debit card is not a credit card, just because there’s a credit card logo on it. That logo just means you can use it wherever that brand of credit card is accepted. When you make an ATM withdrawal or a Debit purchase (where you use your PIN), the money comes out of your account immediately. When you “swipe and sign” as “credit,” the transaction takes several days to clear. This is because these transactions work a little differently, and rely on the merchant settling their credit card machine at the end of the day.
Some “as credit” purchases will put a hold on your account that is different than the amount you actually paid. This is done by the merchant, NOT the bank. One example is (some) gas purchases, where the merchant wants to be extra sure that they’ll get their money, so they’ll place a hold that is greater than the purchase amount. Your $50 gas purchase can be pending as a $75 purchase, until it clears the account. Again, “hold” rules apply to available funds.
A recent development is new regulation that changes the way banks and credit card companies make money with each transaction you conduct. Previously, banks would make approximately 50 cents each time you swipe. The new regulations cause banks to make much less, or even have to pay each time you swipe. You can be sure this lost revenue will be made up somewhere. Do I have to mention again that banks are businesses?
FEES, FEES, FEES — As stated over and over, banks are businesses. With significant sources of revenue slashed through government regulation, fees are cropping up elsewhere. Expect to pay about $5-$30 per month as a “maintenance fee” on your account. This is the cost of doing business. Gone are the days of free accounts, when interest rates were high and banks made plenty of money without them. There are many ways around this fee though, usually involving account activity (perform X number of online banking payments, use your debit card X number of times, have a direct deposit X times each month, maintain a balance of at least X, etc.)
Statement fees are a relatively new development. If you want to get a paper statement in the mail, expect to pay about $2-$5 per month for the privilege. Slightly more if you insist on receiving your “cancelled checks” back. These days, online banking is more than secure, and there is no reason not to avoid this fee by opting out of paper statements. Most online banking will allow you to search, view, and print your cancelled checks, if you need them. Recent changes in the way paper checks are handled mean you no longer get the actual cancelled check back anyway. The copies you’ll receive in your statement are no different than the ones you can print at home.
Check cashing fees are another inevitability. For the “hold” reasons above, don’t expect to be able to cash your check at a bank you do not have an account at, if that check is not drawn on that bank. If you are cashing a bank’s check at that bank and don’t have an account there, expect to pay a fee, per check, of about $5-$10. If you regularly do this, as with a paycheck, it is well worth your while to open an account. It’s very likely that the monthly fee, if you do have to be charged one, will be less than what you’re paying each week to cash your check. Suck it up, and pay the lesser amount. You will also be able to reap the benefits of having your check direct-deposited (in most cases), so it’s available first thing in the morning on payday and you don’t even have to go to the bank to access your money via ATM or debit card.
There are a number of different ATM fees. Some are charged by your bank, depending on the type of account, and some are charged by the owner of the ATM, if it is not your bank’s ATM. Usually, you will not be charged a fee for transacting at your own bank’s ATMs, but both your bank and the ATM owner can separately charge you a combined $5-$10 per transaction. These fees usually apply, even if you’re just checking your balance or transferring, even without withdrawing money.
Debit card fees are another new fee on the horizon, as mentioned above. Expect to soon pay about $5 per month for using your debit card, if you’re not already.
I am able to eliminate most of my fees through good account management. Those that I do pay, I feel are worth the convenience of banking the way I do – online, at branches with convenient hours, convenient ATM’s, and electronically through direct deposits, automatic withdrawals, and with a debit card. These are conveniences that it’s hard to live without these days.
LENDING — Personal, unsecured loans are expensive. The rates are always going to be higher for these types of loans, closer to credit card rates. In general, if you’re not borrowing against something you own or have a chunk invested in (like equity in a house, your car as collateral for your car loan, etc.), that loan is going to be expensive. Credit unions are your best bet for affordable auto loans if you can’t find them at other big banks.
An “equity line of credit” is always a good idea. It can be your safety net. The thing people often forget, is that good credit score/history is required if you want a good rate, or any loan at all. Equity in your home is not enough on it’s own. The time to apply for an equity line is BEFORE you need it. I’ve seen many people shrug off the offer of even a pre-approved line of credit, only to be turned down when they actually need it, due to battering their credit score through months of unemployment. With a line of credit, you only pay for what you use (in addition to a $20-$50 yearly fee), so if you’re not using it, you don’t owe anything. Its there, just in case you ever do need it.
RATES — When rates are low (which they are as I write this), lending is cheap and this is good. The flip side, is that savings accounts and CD’s return very, very, very little in interest and this is not so good. That’s the way rates work, sorry. High rates mean the exact opposite.
AFTERWORD — Lastly (because it bears repeating, again), banks are businesses. Banks want to have you as a customer. They want you to open accounts with them, put more money in those accounts, and borrow more money from them (credit score willing). In short, they want to make money off of you. Sometimes this comes in the form of high balances in your account, which the bank invests to make itself money. You get some of that money back in interest, as with a savings account or CD. Other times this comes in the form of various fees, or in interest charged TO you, as with loans and credit cards. The vast amounts of money that banks loan out has to come from somewhere, after all. Banks are not giant vaults with money just sitting there, stagnant. It can be a delicate balance.
Banks maintain vast infrastructures, and employ lots of people to manage your account. From the cost of operating branches, to the cost of maintaining powerful computer databases. There are costs involved in printing and mailing your statements, underwriting your loans, processing your transactions… The list goes on and on. On average, banks spend $300 per year to maintain each account.
Consequently, you are not an “important” customer, if you are erroneously looking for a completely free place to put your money and get a bunch of totally free conveniences. Banks don’t care about your checking account that regularly carries a balance of $1 between paychecks. Banks don’t make money on these accounts, in fact, they loose money.
Don’t expect free services like your $1 account entitles you to them. Bank smart, know your account balances and pay attention! If you do these things, you can be happy with your banking experience, or at least not depressed over it.