You Have Your First Paycheck – Now What?

Now that you have a job and a place to live you will need to plan on paying your bills.  Some can be paid in person but you will most likely get tired of that when you have to decide between paying your electric bill on the other end of town or catching the latest Quentin Tarantino film with your buddies.  The other options don’t look too good either:  you know you should never send cash through the mail (its not safe and can be easily stolen) and you get tired of paying through the nose for the local 7-11 to print up money orders or carrying around large amounts of cash.  Yes you guessed it – its time to open up a checking account and learn how to write checks and/or use a debit card.

This is convenient and probably your best choice but has its problems too.  When you open a checking account it is very important to keep good records and never bounce a check.  Doing this by mistake will cost you money and may lead to a bad credit rating (not good).  Doing this on purpose may lead to criminal charges (bad, very bad).  If you don’t have enough discipline to avoid these then paying bills in person or by money order may be a better option.

If you decide you have what it takes then its time to head to the bank.  But opening a bank account is not as simple as walking up to a bank teller and handing over crumpled wads of cash; there are lots of decisions to make and confusing banking jargon to wade through. This module will teach you what you need to know about making smart decisions when opening a new bank account.

Choosing the Right Bank

While there are many places you can but your money they can generally be broken down into three categories:  large chain banks, local or regional banks, and credit unions.  Which one is right for you depends on shat services you needs and what those services cost.

Large chain banks - (Citibank, Chase, US Bank, Bank of America, etc.)

Advantages

Large chain banks offer two main benefits that the others don't: convenience and reputation.

·         Convenience:  Because there are so many of these banks, they offer the advantage of having plenty of ATMs around, in most any country you may travel to.  The big banks also try as hard as they can to make it easy for you to access information about your stored money. This means that besides the branches they've got located on every other street of your city, they probably have 24-hour toll free phone service and internet access. If one Sunday night you are suddenly overwhelmed with the desire to know exactly how much you deposited into your account on a certain day two months ago, just use the phone or get online and look.

·         Reputation: If you belong to a big-name bank, there is little to absolutely no chance of it folding and leaving you in a bind to find a new bank. So if you're one of those people who don't like change, stick to a bank with a secured place in the banking world.

Disadvantages

While these banks are generally available wherever you may go and offer many more ATM options, these come at a price.  In most cases their fees and loan rates are higher and the interest they offer you on your money is generally less.

Small neighborhood banks – (Pacific Continental, Umpqua, Centennial, etc.)

Advantages

Small neighborhood banks have two cozy things going for them: location and friendliness.

·         Location: Neighborhood banks are by definition located in your neighborhood, making it very easy for you to make a trip to the bank. If you're the sort of person who literally likes to run your errands, this is the bank for you.

·         Friendliness: While there is no guarantee that tellers at your local bank will bake you pies, most people find that employees at their local banks are just plain friendlier than the ones at big, impersonal banks. Small banks don't have the option of blowing off a potential or current customer, so they'll hire tellers who make it their business to smile until their faces hurt. Instead of treating you like an account number, these tellers will treat you like a real person (with an account number).

Disadvantages

As the name implies, these neighborhood banks are generally not located outside your area and any banking you do while traveling will need to be done through an ATM which will often charge you for the service.  Also while the fees are often lower than the large chain banks, some services may not be available to you.

Credit unions – (Oregon Community, SELCO, Pacific Cascade, etc.)

Advantages

Credit unions have the same advantages as the neighborhood banks as well as lower fees and often offer more services useful to its members.

·         Location: Credit unions offer many branches in the local area, making it very easy for you to make a trip to the bank.

·         Friendliness: In most cases credit unions are smaller and serve people in a certain area or in a certain profession.  People are usually friendlier and have more time to help members with their financial issues.

·         Cost:  Since they provide services to smaller groups of people, cost for services are usually lower, and interest they offer on your money is generally higher.

·         Additional Services: Credit union occasionally offer additional services to their members such as money management or credit counseling classes, home or car buying assistance, and special promotions.

Disadvantages

As with neighborhood banks are generally not located outside your area and any banking you do while traveling will need to be done through an ATM.  Fortunately many credit unions have joined together to provide this service to other credit union members at little to no cost.

Choosing the Right Accounts and Services

Now that you have picked out a bank, you need to decide what type of account you should open.  Some services are explained here include savings accounts, checking accounts, linking or combination accounts, and other services.

Savings

As you might have guessed a savings account is designed to save your money. However, the main purpose of having this type of account is not only to store your money safely away, but also to gain interest. Interest means that the bank will pay you for letting them hold your money.  How much interest you get depends on the amount you have in your savings account. Bottom line: the more money you save, the more you'll gain.

There are several types of savings accounts, and they vary from bank to bank. Not all banks will have each of the following kinds of accounts, but they are covered broadly enough so that you have at least a general idea of what to ask for when you step into the bank:

Checking

The neatest thing about having a checking account is the fact that you get your very own checkbook, with you name on it and everything! (It will not, however, be so neat when you're writing out checks for huge bill payments.) All banks offer checking accounts, but some offer checking accounts that also work as savings accounts. We'll go over both types in detail.

Anytime you write a bogus check (like scribbling down $50,000 to buy that Mercedes you've always wanted, when you actually have closer to $5 in your account), the check will "bounce." This is just a cute way of saying that the payment won't go through and you'll be held responsible for messing up - your bank will fine you an amount that will undoubtedly make you cringe, the store may also charge a fee and the police may pay you an untimely visit. So don't write checks without making sure that you can honor them first.

Linking (combination)

If what you really need is a checking account, but what you want is to earn interest without paying the high fees for interest checking, you have the option of linking a savings account to your regular checking account.  

The line between linked accounts is usually pretty distinct - you can't have $1000 sitting in your savings account, earning interest, and expect to pay your checks through that same account. You must first transfer some of that money into your interest-less checking account first.

When making deposits, you'll have the option of putting the money into one of your accounts. (You can shift the dough between accounts once it's in.) We recommend that you don't try to be slick by keeping all your money in your savings account until you have to pay for a check (and then transferring the exact amount you wrote the check out for into checking). Unless you live next door to, on top of, or inside the bank, and have easy access to it at all times, it's quite possible that your fantastic scheme will end up costing you.

Other Services

In addition to the types of accounts listed above banks offer other services that meet the needs of their members.  Some are available to all customers; others require that you have good credit and a responsible bank history.

Qualification and identification

Before heading over to your bank, make sure you have important documents with you.

In addition to these requirements, get out an ID with your picture, an ID with your signature, and anything else you've got that tells the bank you're legit (a passport is always nice).

Questions to ask

The following questions MUST be answered before you give your money away. What if you forget to ask about time deadlines, and suddenly realize that you can't touch your money for three years without paying a huge penalty? So always get the answers to the following:

In addition to these questions, don't be shy when it comes to asking for a clarification on anything that confuses you. You are dealing with your hard-earned money, after all, and the last thing you want to do is blow it all over a misunderstanding.

Credit

Establishing good credit is valuable. Having the ability to borrow money enables us to obtain things we would otherwise have to save years to afford: homes, cars, a college education. Credit is an important financial tool, but it can also be a dangerous temptation, leading people into debt far beyond their ability to repay. That is why learning how to use credit wisely is one of the most valuable financial skills anyone can learn.

Common Reasons for Denying Credit
Among the most common reasons people are turned down when they apply for credit are:

In general, creditworthiness must be determined on the basis of criteria that relate to your ability and willingness to repay debt. You cannot be denied credit based on your sex, marital status, race, color, religion, national origin, age, reliance on income from a public assistance program, or exercise of rights under the Consumer Credit Protection Program.

If you are denied credit, the creditor must provide you in writing a statement of the action and your rights, as well as the reason for denial, or how to request the reason. For information on the laws applying to credit,

What Lenders Look For
Before creditors lend money, they need to be assured that the funds will be repaid—in other words, is the prospective borrower creditworthy? To find out, they ask for various types of information.  Creditors obtain much of this from your credit report, a computerized profile of your borrowing, charging, and repayment activities.

·         Income & Expenses:  Lenders will look at what you earn and your regular expenses, such as rent, utilities, food, and other ongoing items. The amount left tells them whether you can afford to take on additional debt.

·         Assets:  Do you have assets that can serve as collateral? Lenders will look for things like bank accounts and valuable items such as a house, if you own one.

·         Credit History:  How do you manage debt? If you have credit cards or have borrowed money before, you have a history that indicates to prospective lenders whether you are creditworthy by revealing details about the amount of debt you already have, how many credit cards you have, and whether you make payments on time.

. Establishing Credit

No Credit

At first, credit may seem like a catch-22 - you can't get any because you don't have a credit history. This is a common problem for people who have just started working.  many lenders will consider a nontraditional credit history if you have a limited credit history or no credit history. Presenting a series of paid receipts and cancelled checks for rent, utilities, and car insurance payments made on a consistent basis can help you document a pattern of paying your monthly obligations on time.  In addition, there are a number of things you can do to start establishing credit:

Put accounts in your own name
Begin by putting your utilities, phone and apartment in your name and open savings and checking accounts. Over time, your deposits, withdrawals, and transfers will demonstrate that you can handle money responsibly.  This allows you to establish a regular payment history under your own name and Social Security number.

Apply for small loans and low-limit credit

Applying for a loan is another option, but beware that this method of establishing credit history will cost, since loans require the payment of interest.  You could take out a bank loan secured by the funds you have on deposit or by items you own, such as a car. You could ask a friend or relative who has good credit to cosign a loan, which means that he or she shares the liability for the loan with you.  You could also apply for department store and gasoline credit cards, which generally are easier to obtain than regular credit cards.

Before you apply for any credit, however, make sure you understand the terms. For example, how long is the grace period—the time you have to pay the current balance in full before finance charges are incurred? Is there an annual fee, or other fees, associated with the credit? If you believe that you will carry a balance, you need to know how finance charges are calculated.

Use your credit wisely
To start building your credit history, use your card to make purchases, but don't go over your credit limit, and pay your bills on time. You should pay most or all of the balance each moth to avoid interest charges but you are required to pay at least the minimum payment due each month. Once you get credit like a loan or a credit card, the most important thing is to keep control of it so you can achieve your financial goals without getting too far into debt.

Patience is important. It takes time to establish credit, to build a record of consistency in making payments that demonstrates your creditworthiness. And it is much better to go slowly and assemble a strong record than to apply for too many credit cards or a loan that is larger than you can handle.

. Managing Your Credit

Keep track of your spending
Keep track of the checks you've written, credit card transactions, and ATM card usage. Review your monthly statements when they arrive, and report any possible discrepancies immediately.

Don't exceed your credit limit on lines of credit and credit cards
Your "available credit" is how much credit you have left on a line of credit or credit card (your credit limit minus your outstanding balance). Be careful to keep your spending below this amount.

The 20/10 Rule: Never let your credit card debt get to be more than 20% of your total yearly income after taxes. And each month, don't have more than 10% of your monthly take-home pay in credit card payments.

Have an emergency fund
Keep at least a 15% cushion of available credit in case of emergency. Or better yet, keep an emergency savings fund of three to six months' living expenses in a liquid, interest-earning account. That way if you lose your job or have a big unexpected expense, you don't have to borrow more than you're comfortable repaying.

Pay what you owe

Make timely payments
This is one of the best ways to establish yourself as a good credit risk to future lenders.

Stay in touch with your creditors
Contact your lenders immediately if you fall behind on your payments. Most creditors are willing to set up alternative payment options, especially if you inform them right away of your situation.

Protecting Credit
Once you have obtained credit, it is essential to protect it. This means safeguarding your credit, debit, and ATM cards, as well as your account and personal identification numbers (PIN).

Carry only the cards you expect to use, and keep the others in a safe place. Maintain a list of account and telephone numbers of the companies that issued your cards. Then, if the cards are lost or stolen, you can notify the companies quickly. If your notification is received before the cards are used, you have no liability. If it is received after a credit card has been used, your liability cannot exceed $50 for each card. Your liability for ATM cards depends on how quickly you report the loss.

If you dispute an item on a bill, you are responsible for notifying the creditor in writing within 60 days of receiving the bill. You should include your name, account number, the item you believe is in error, and the reasons why.

 

 

Finance Mod 1 – Worksheet

1.     What are two advantages of having a checking account? __________________________________

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2.     Look at the advantages and disadvantages listed for each type of bank.  Which bank are you likely to choose?  _________________________________  Why? ____________________________

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3.     Passbook savings, regular savings, and high-interest savings are all referred to as ‘liquid’ accounts.  What does ‘liquid’ mean in this context? _______________________________________ ___________________________________________________________________________________

4.     Why is a CD savings account not a ‘liquid’ account? ______________________________________

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6.     Why is it important to keep very accurate records and an up-to-date account balance if you choose to have a checking account?  ___________________________________________________

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7.     Which banking services would be helpful to you when you complete the program?  ____________

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8.     What is the difference between a credit card and a debit card?  _____________________________

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9.     What are the six most common reasons for denial of credit?

a.     ________________________________________________________________________________

b.    ________________________________________________________________________________

c.     ________________________________________________________________________________

d.    ________________________________________________________________________________

e.     ________________________________________________________________________________

f.      ________________________________________________________________________________

10.  T or F         It is safe to mail cash to pay your bills.

11.  T or F         All checking accounts are exactly the same.

12.  T of F         You should subtract each check and debit transaction from your account.