Banking is an activity we all need to do, and taking a little time to choose the right financial institution and the right products that fit your needs can save you a lot of money in fees, and could help you earn a bit without doing any work too!  In this section we’ll describe some different types of financial institutions (more than just “banks”), some common banking products and services, and things to watch out for when choosing what’s best for you.

Types of Financial Institutions

There are many types of financial institutions, some of them are depository institutions – meaning you can deposit your money with them – and some are only available for borrowing from.  We’re going to focus on depository institutions right here, and there are three main types that we’ll look at:

  1. Banks: these are the cornerstone of the financial system – both consumers and businesses rely on banks to hold their money securely in accounts, and are also a primary source for borrowing money. Banks are owned by stockholders, who need not hold any of their money in the bank, so banks are almost exclusively for-profit businesses.
  2. Credit Unions: these are member-owned financial institutions, and often require members to maintain a deposit account and/or a loan account with the credit union to maintain membership.  Credit unions offer many of the same products and services as banks, and can serve business accounts too (often for small businesses with just a few owners who are personally members).   Eligibility to join the credit union may be based on living or working in a specific area (city, county, or state) or working for a specific company or industry, but other credit unions will allow almost anyone to join.
  3. Thrifts: these are sometimes privately owned by stockholders and sometimes owned by the depositors and borrowers.  Another name for a thrift is “Savings and Loan Association”.  The important thing for this type of institution is that it focused on consumers. At least 65% of the lending portfolio must be in consumer loans.  It can make mortgage loans, auto loans, and other consumer loans.

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Common Banking Products

Banks, credit unions, and thrifts do two main things: enable people to save their money securely now so they can access it later, and borrow money and pay it back later.  We’re going to focus on the products and services available for saving money, but encourage you to check out our other site, Credit Wizard, for more information about common options for borrowing money.

  • Checking Account: this is the most common type of account, where you have immediate access to your money, and can write a check from the account, or use a debit card to pay others directly, in addition to accessing your money.
  • Savings Account: usually banks offer a higher interest rate for savings accounts, in exchange for removing some of the convenience in getting to your money at any moment. Generally you need to transfer your money to your checking account, or make a withdrawal, to get to the money in the savings account, but you can do this on any business day.
  • Certificate of Deposit: also known as a CD, this is a savings option where you lock up the money for a set period of time (from a month to multiple years). If you take out the money early you pay a penalty, so its much less flexible than a savings account.  But the interest rate should be substantially better.
  • Money Market Account: this account type tends to blend a checking account and savings account, so the specifics vary by bank. But look for higher interest rates, like a savings account, but potentially having access to your money with checks and/or a debit or ATM card.  Usually, you are limited on how many transactions per month (common limit is 6), before there’s a fee for additional transactions.