There are many options when opening a bank account. Initially, it may be challenging to navigate from choosing which bank to the type of account. First, establishing your financial goals is essential. This article will help you maximize the benefits of your bank account while minimizing fees and managing your money effectively. We will discuss specifically the steps of opening a bank account in California.
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What are the bank account types?
Most major banks and credit unions offer several options for bank account types, including:
- Money Market
- Certificates of deposit
As with any state, California has these bank account types readily available to consumers.
What is a savings account?
People use this type of account to set aside money for future use. This money collects interest over time and is often the first official bank account consumers open. For instance, young adults may open this account to save money earned from their first job and to manage their finances while in college.
It is not used typically for ongoing expenses due to limitations often placed on withdrawals. Instead, it is an excellent way to save money for financial goals or emergencies.
- Potential to earn interest. You can accrue interest over time with your savings account. The rates depend on the bank you choose, but the national average is about 0.09%, with higher rates reaching 2.05%.
- Low startup requirement. Many savings accounts can be started for just $25 or as little as $1, so consumers may begin saving with even modest amounts)
- Easy to open and access. Although there are federal limits to withdrawal (see below), there are many options available to withdraw or deposit your money, including via ATMs and 24-hour online access that is not available to long-term investment types of accounts.
- Automated bill payments. Many financial institutions allow consumers to set up automatic bill payments from their savings accounts. These charges may not be subject to withdrawal or transfer laws and can help you avoid missed payments or late fees.
- Minimum balance requirements. Most savings accounts require minimum balances. If the account falls underneath this balance, the bank may deduct fees from your account and negate the interest accrued.
- Lower interest rates. Interest earned through savings accounts is often lower than other types including money market or certificate of deposits.
- Withdrawal Limits. Under federal regulation D, there are limits to withdrawing funds from savings accounts- six times per month. If you exceed this limit, the banks may charge a fee, or they may change your account from savings to checking if you continue to exceed this limit.
- Changing interest rates. Your bank is free to set and change interest rates. However, high-interest savings accounts typically stay in line with the movements of the federal rate.
- Inflation. A noncompetitive interest rate may not make up for inflation and leave you with an account balance worth less than when first deposited.
Savings Account Tips
- There are online options if local banks or credit unions are not affordable. These online accounts often pay higher interests and charge the lowest fees.
- To grow a savings account, deposit a balance initially and then set up automatic monthly deposits into savings.
What are Checking accounts?
Typically consumers use this account type for everyday spending. Checking accounts are linked to a debit card used for purchases or ATM withdrawals. Checking accounts also have check-writing abilities included. You can use this account type to deposit cash or check and pay your bills. Checking accounts also often include online bill-pay services that streamline payments.
- Convenience. With your debit card, you can access your funds without carrying cash around. You can also receive your paycheck instantly, as many employers use direct deposit to send your earnings to your bank instantaneously. You can also easily pay bills and make purchases online or via your debit card.
- Build credit. It can help establish and build your credit score. You can set up scheduled payments to avoid missing or sending them in late.
- No interest.
- Subject to a variety of fees and restrictions. These include monthly maintenance fees and minimum balance requirements that can become expensive depending on your bank. However, these fees may be waivable, and there are some free checking accounts without them.
Extra Tips for Checking accounts
- Make sure to make a note of your account inflows and outflows regularly. This can help you avoid fees and spot fraud or mistakes before they cause significant issues.
- Debit card transactions take the money directly out of your checking account. Also, credit cards receive less liability for unauthorized charges than debit card charges.
What are Money Market Accounts?
This account combines features of checking and savings accounts. They collect interest at higher rates than checking or savings accounts and offer limited check-writing privileges.
This account type may be an excellent option for those who carry high balances in their checking account and want to earn interest while still maintaining the ability to write checks.
- Customer perks. Banks give their money market investors additional perks such as connection to other accounts, bank transfers, or waiving penalties.
- Earn interest. It is excellent for people who hold high balances to park their cash for the short term.
- Minimum balance requirements. They often have higher balance requirements than other types of bank accounts.
- Interest Rates. It can be lower than other account types.
- Withdrawal limits. Similar to savings accounts, often capped at six-monthly.
Other money market account tips:
- If there are no money market accounts within your budget, look at online-only banks and cash management accounts which are often more affordable.
What are Certificates of Deposit?
These accounts are similar to savings accounts but hold your money for only a certain period of time, such as three months. Often, you must commit to keeping your money in the certificates of deposit.
This account type is ideal for financial goals with a planned end date.
- High Interests. Earn more money for not spending it right away. There are short-term and long-term options available.
- Penalties for early withdrawals. If you pull your funds out before your term ends, you may need to pay fees that may take away from what you've earned and even your initial deposit.
More tips for certificates of deposit
- You can set up multiple certificates of deposit with staggered term end dates to make portions of your savings available at a given time.
- You can look into banks that offer this account type without penalties for withdrawing early.
***All four of the above accounts are federally insured for up to $250,000 per bank if your bank is a member of the federal deposit insurance corporation (most major banks are) or credit unions that have the National Credit Union Share Insurance Fund (NCUSIF).***
What are Retirement Accounts?
This account type is used to set aside money for retirement spending. Banks can offer either individual retirement accounts (IRAs) or small business accounts (401(k)).
Both IRAs and 401Ks allow you to avoid paying income tax, but you pay taxes at other points depending on the account type.
These are best for saving for retirement because it allows you to invest money in the stock market and creates greater returns than you could get on deposits in the previous accounts mentioned.
- Less tax burden. This makes it easier to save money and can lead to more significant balances in the long term.
- Caveats. Any tax benefit comes with strings attached. Make sure to refer to your banker about the rules, including eligibility. Also, refer to your tax preparer or a CPA for assistance to determine whether your taxes may be affected.
- Early withdrawal limits. You may need to pay taxes and steep penalties if you withdraw early.
- Not federally insured. This account type is not insured like the aforementioned account types, and there is a risk of losing it.
Retirement Account tips
- It may be useful to speak to a financial advisor to help plan on how much to save and what account types to maximize your gains while minimizing your losses.
- If your employer offers a 401(k) match, consider contributing enough to get this match before you invest money into a retirement account.
How to choose a bank or credit union?
Shop around and look into various options depending on the best match for your immediate needs. As you compare the different financial institutions, note account usage restrictions and any fees that can add up.
There are three basic types of institutions:
- Banks: They offer most of the basic services needed. Local and regional banks often have more lenient fees, and it is possible to have them waived compared to larger banks.
- Credit unions are customer-owned and provide many of the same services as banks. These are not-for-profit and you can enjoy competitive rates because they aren't trying to increase profits. This is not always the case so make not of fee schedules regardless.
- Online banks and credit unions: These operate only online. There is no in-person office or branch and most of the services, so you handle things independently. If you are comfortable using a computer and running basic banking transactions, this option may help you reduce fees and earn higher interest.
Where can I file a complaint against a credit union or bank?
Where to file your complaint will depend on who regulates the financial institution. If it is a credit union, you can search the name here and then look under the “Charter State” field. If it lists “CA,” your credit union is regulated by the California Department of Financial Protection and innovation. You will need to send your complaints to this California Department. If it instead lists “N/A” under the Charter State, it is federally regulated, and you will need to file a complaint with the National Credit Union Administration.
To determine who regulates your bank, search the California Department of Financial Protection and Innovation site or contact the Federal Financial Institutions Examination Council's Consumer Help Center.
How to open your bank account?
You can open a bank account online or through a branch in person (unless it is an online-only bank). Opening accounts online can be done anywhere and at any time. However, be careful of fake sites with similar names as your desired financial institution. If you prefer to open one in person, you must do so during business hours. Make sure to bring:
- A government-issued ID (driver's license, passport, California-issued identification card)
- Your social security number
- Your mailing address
- Deposit amount (if required)
If you need to obtain a photo identification card, you can find out more and obtain one through the California DMV website.
You can call your desired bank beforehand to ensure you have everything necessary to open your chosen account type. You can also ask to provide other forms of identification if you cannot give the above-listed items.
Does your financial history affect
your bank account approval process?
You do not need a spotless financial record to open an account, but the bank may decide to approve or deny your application based on this information. They may check your credit to see if you've had difficulties repaying loans in the past. These checks often do not damage your credit, but it may be best to ask. Having bad credit may lead to denials.
Other steps for making your bank account?
When you open your account, you'll have to agree to abide by the rules of your given account. Make sure you understand your contract and know what you're getting into. Call your financial advisor or ask your local banker any questions you have. You may need to print, sign, and mail certain documents to your bank before the account is active. This is not always the case, but send any paperwork if your bank requires it.
How can minors get a bank account?
If you're under 18, you need someone over 18 to be a joint owner in California. You can eventually get your account once you turn 18.
Get everyone together when opening a joint account, so everyone is present to sign if necessary.
How to start using your account?
If opening a savings or checkings account, you often need to fund your account. This is usually a required part of opening your account. There are several ways to do so, including depositing cash, a check or money order, setting up a direct deposit with your employer, or transferring your funds electronically.
Your account should be ready within a few minutes or days once you complete the steps above. Your debit card may be mailed to you or given directly to you in person if you visit a branch. You can sign up for alerts, remote check deposits, and online banking to make the most of your account. Ask your banker for these to take advantage of these opportunities.
Speak to your financial advisor for any additional clarifying information. You can also go to the California Department of Financial Protection and Innovation site to learn more about California-specific financial codes, laws and regulations, and protections offered in the state.