Entrepreneurship University
A Course in Personal Financial Planning

Establishing Credit

How to choose a checking account

A checking account is the primary reason why many people use a bank. Probably no other account offered has as many variables as a checking account.

The right checking account will serve your needs without costing a lot of money in fees or forcing you to maintain a high balance to avoid those fees. The wrong checking account can cost you plenty.

If you have a checking account, review your previous statements. Look at how many checks you write per month and your ending balance. Do you bounce checks? Should you have overdraft protection? Do you have to have your checks returned? Are ATM fees killing you?

A critical element in selecting a checking account is knowing the minimum balance you’ll carry day in and day out. Many institutions let you open a checking account with less than $100 but require a much higher minimum — maybe several hundred dollars higher — to avoid fees. If your balance dips below that minimum you’ll be assessed a fee.

Watch out for accounts that charge a monthly service fee regardless of how much money is kept in the account.

ATM fees also play a role when choosing a checking account. One approach to lessening these fees is to draw more each time and show the discipline to manage the excess of what you need right now.

If you use a checking account simply to write checks and you just want to keep enough to cover payments, or if you can’t be sure how much you’ll keep in the account, find a free checking account, preferably without fees.

How to choose a credit card

Spending habits

The first question to be answered is how you intend to use the card. Are you the kind of person who will pay off the card every month without fail, or do you anticipate carrying a balance from month to month? Are you going to use it to pay for everything, or just for emergencies?

  • If you’re going to pay the bill in full every month, then the interest rate doesn’t really matter to you. Look for a card with no annual fee and a longer grace period so you don’t get hit with a finance charge.
  • If you’re going to carry a balance , you want the lowest possible interest rate and a low introductory rate.
  • If this is going to be your go-to-card for most of what you buy , look for a card with a generous credit limit and a solid rewards program.
  • If it’s only going to be used for emergencies , go for a no-frills card with a low interest rate and low fees.

Credit limit

This is the amount of money that the credit card issuer is willing to let you borrow. Depending on your credit history, it could be anything from a few hundred dollars to tens of thousands of dollars. You don’t want a situation in which you’re close to maxing out your credit limit. It can hurt your credit score — and some credit card issuers have cut customers’ credit limits to an amount that’s lower than their current balance. Adding insult to injury, there’s a penalty when that happens.

Fees and penalties

Common charges include fees for transactions, such as balance transfers and cash advances, or for asking to increase your credit limit or make a payment by phone. There also are penalty charges for paying your bill late or going over your credit limit (they don’t decline your card; they just sock you with a fee for it).

Look for cards with reasonable fees. On balance transfers, for instance, look for offers with no transaction fees and zero percent interest for at least 12 months. And don’t pay extra for rewards programs. There are plenty of card issuers who don’t charge extra for them.

Other Bank Products

If you are able to save money, banks often have products that can get you started.

Deposits

Any money you have in savings and checking accounts or in certificates of deposit (CDs) is known as a deposit. Your financial institution is committed to returning all of your deposits (plus interest) whenever you ask. You can even take money out of a CD before it matures, however, you may have to pay a penalty for early withdrawal. Your institution is also required to carry government insurance on your deposits of up to $250,000.

Financial institutions can also provide investment products like mutual funds and annuities to their customers. Your bank or credit union may sell you this type of product, but it is not obligated to pay you back for any losses you may have if the investment is not successful.

Equally important, the U.S. government does not insure you against investment losses, even if you purchased the product at a bank or credit union.

Investing in a Mutual Fund

When you invest in a mutual fund, your money is put together with the money of other investors and is used to purchase a variety of securities such as stocks, bonds, and other financial instruments.

Mutual funds are run by investment professionals who decide which investments to buy or sell for the fund. Their decisions are guided by the fund’s investment goals.

For example, some mutual funds are designed for people who want to have easy access to their money and invest only for a short time. These funds invest primarily in government securities or very short-term bank CDs, where the investment risks are moderate.

Other mutual funds appeal to people who are willing to take on more risk with the goal of a higher return. Such funds invest primarily in corporate or municipal bonds.

Investing in an Annuity

When you buy an annuity, the bank or insurance company invests your money and agrees to pay you back according to the annuity’s contract terms. The annuity can be part of a long-term savings plan for retirement. Like mutual funds, they are not insured by the U.S. government or by the bank where you buy them.

Some annuities help you set aside money on a tax-deferred basis. You don’t pay taxes on the income earned by this money until you retire. Other annuities allow you to receive income immediately. However, the amount of income you will receive can go up or down with changes in financial markets and the income won’t be tax deferred.