The subject of finances and banking can be a bit tricky, but if you take the time to learn about it, then it’s something that will help you throughout your life. From knowing the terms to making better decisions with your money, understanding the basics of how banking works will help you in the long run. This article is going to go over some basic tips to help you understand how banking works, how to manage your money wisely and provide you with some excellent advice that could benefit you in the future.
Opening Up A Bank Account Doesn’t Mean It’s A Contract
Many people feel that when they open a bank account, it means that it’s a legal contract. However, banks are not legally required to follow through with providing this service if you fail to keep up with the terms of the contract. If you don’t make regular deposits or withdrawals from your account, then there is no reason why they need to provide their services for free. Banks only require a fee on accounts that have been inactive for six months or more. Many individuals choose to withdraw all of their money and close their account, which will mean that the bank has no reason to charge you for keeping your money in savings. Keep this in mind if you’re considering closing your account because fees associated with maintaining your balance and account will apply.
Types Of Licenses
Two different types of licenses are issued to money management institutions, E-Money license, and Banking license. Even though it might sound like the same thing, when you do a more thorough e-money license vs banking license comparison, you will see that these are two completely different types of licenses. E-money is a digital currency that has the same value as legal tender does in your home country. It can facilitate internet transactions between individuals or be converted into various currencies through an exchange mechanism. E-money providers have Issuing & Operating licenses that allow them to issue e-money for public use, while electronic or online payment organizations like PayPal coordinate all this with their Banking Bodies.
On the other hand, a Banking license is one of the most highly regulated licenses. Only banks can issue loans and credits, manage assets for their clients and conduct brokerage activities. Its main goal is to facilitate trade and commerce through the provision of financial services. A banking license is only issued under the authority of the government, and they have certain rules that banks have to follow to maintain their license, while an E-money license can be issued by either a regulatory authority or a self-regulated organization.
Understanding Interest Rates
Interest rates are basically how much interest will be charged for using someone else’s money, meaning interest rates determine the rate at which your bank borrows from other banks or lending institutions, this cost will then be passed down to you in one way or another. Since most standard bank accounts come with a flat interest rate that stays consistent throughout your time with them, understanding the different types of interest rates can help you make more informed decisions.
A fixed interest rate is simply a preset or constant that will not change for the ongoing duration of your account, thus the interests you pay won’t fluctuate with any outside market changes as well as they’re applied to your entire balance, not just new purchases. On the other hand, a variable interest rate does increase and decrease along with market fluctuations, and it is most often used on credit lines or loans. A prime interest rate is a prime way for financial institutions to decide how much interest to charge their customers for borrowing money from them.
Overdraft Protection: Helpful or Harmful?
An overdraft is when you’re approved for a loan and the funds aren’t available in your account, but instead of rejecting your application and returning your money, some banks choose to cover you by approving the loan anyways. Whether this sounds beneficial or harmful depends on the circumstances though—if you have a positive bank account balance after they approve your loan or purchase, then they’ll transfer that amount into your bank account, so there’s no real harm done except for the fact that you might be charged an overdraft fee if you were to do it multiple times throughout one month. However, if you have a negative bank account balance right before they approve your transaction, then paying off that loan or purchase will end up drawing the money out of your bank account, and you’ll have to pay overdraft fees as well as an interest just for borrowing from them. In short, it’s best if you learn how to properly manage your finances as opposed to opting in for something like this.
Maintenance And Other Fees
Most free checking accounts come with a list of rules that go along with the—basic requirements such as maintaining a minimum balance, paying certain types of fees on top of the monthly service charge, and so on. However, most banks differentiate themselves through their rewards programs, which means they may not be worth looking into if they don’t offer any extra incentives for having an account with them. That said, fee-free banking is something you should look into.
As you can see, there are many things to consider before signing up for a new bank account—from the type of banking license they have to the types of fees they charge and so on. However, if you keep all of this information in mind before choosing where to open an account, then your transition won’t be nearly as difficult since you’ll know what to expect from each one beforehand.