How banks work: accounts, debit cards and interest
Tap a card at a store and the money leaves your account in seconds. But where was that money sitting, who was keeping it safe, and why would a bank pay you to keep it there? This lesson opens up the bank and shows you how it actually works, so you can pick an account, use a debit card without surprise fees, and make your savings grow a little while they wait.
What do you think a bank does with your money?
When you deposit $100, what do you think happens to it? Is it sitting in a vault with your name on it? Write your best guess.
What a bank actually does
A bank is a business that does two main things with money:
- It keeps deposits. When you put money in, you're making a deposit. The bank keeps track of how much is yours and lets you take it out whenever you want, which is called a withdrawal.
- It lends money out. Your $100 isn't sitting in a vault. The bank lends most of the money people deposit to others, for things like car loans and home loans, and charges them interest.
The bank pays savers a little interest and charges borrowers more. The difference is one of the main ways a bank makes money. That's why a bank is happy to pay you to keep your savings there: your deposit is what it lends out.
The price of using money. Savers earn interest from the bank; borrowers pay interest to the bank. It's usually shown as a yearly percentage.
Is my money safe?
If a bank lends out deposits, what happens if it runs into trouble? In the United States, deposits at insured banks are protected by the FDIC (Federal Deposit Insurance Corporation), a government agency, up to $250,000 per depositor, per bank, for each type of account ownership. Credit unions have the same kind of protection through the NCUA. Other countries have their own deposit protection schemes. Look for the insurance logo before you open an account.
A credit union works like a bank, but it's owned by its members instead of shareholders. Credit unions often have lower fees, and many serve a particular school, employer or town.
Checking vs. savings accounts
- A checking account is for everyday spending. It usually comes with a debit card, and you can move money in and out as often as you like. It usually pays little or no interest.
- A savings account is for money you're keeping for later, like your goal savings and emergency fund from Lesson 3. It pays more interest, and some limit how often you can take money out, which helps you not spend it.
Many people use both: money comes into checking, and they "pay themselves first" by moving part of it to savings right away. If you're under 18, most banks will ask a parent or guardian to open the account with you.
Debit cards: spending your own money
A debit card takes money straight out of your checking account when you pay. It feels like a credit card, but it's very different: a debit card spends money you already have; a credit card borrows money you have to pay back, often with interest (more on that in a later course).
Because a debit card spends real money instantly, the main thing to watch is your balance, the amount in your account right now. Spend more than your balance and you may overdraft: the bank either declines the payment or covers it and charges an overdraft fee. At some banks that fee can be $30 or more, which can cost more than the snack you bought. Many accounts let you switch overdraft coverage off, so a payment is simply declined instead.
Fees to watch for
- Monthly maintenance fees: a charge just for having the account. Many student and teen accounts don't have one, or waive it.
- Minimum balance fees: a charge if your balance drops below a set amount.
- Out-of-network ATM fees: using another bank's ATM can cost you a fee from both banks.
- Overdraft fees: spending more than you have, as above.
Before opening an account, ask: "What fees could I be charged, and how do I avoid them?" A $5 monthly fee is $60 a year, which is money you could have saved.
How much does interest really add?
Interest on savings is usually shown as an APY (annual percentage yield): what you'd earn in a year, including interest on your interest. Try different balances and rates. Rates change over time, so these are examples, not today's offers.
Assumes the rate stays the same and you don't add or take out money. Real savings rates go up and down.
Keeping your account safe
- Your PIN is yours alone. Never share it, even with friends.
- Banks don't ask for your password by text or email. A message saying your account is "locked" with a link to click is a common scam called phishing. Open the bank's app yourself instead.
- Check your activity. Look at your transactions every week or two. If you see something you didn't buy, tell a parent and the bank right away.
Connect the word to its definition
Tap a word, then tap the definition that matches it.
Back to your guess
Here's what you guessed at the start:
You haven't written a warm-up answer yet. Scroll up to try it.
Now explain in your own words what a bank does with your deposit, and why it pays you interest.
Key words from this lesson
- Deposit / withdrawal
- Money put into / taken out of an account.
- Balance
- How much is in your account right now.
- Checking account
- An everyday spending account, usually with a debit card.
- Savings account
- An account for money you're keeping, which pays more interest.
- Debit card
- A card that spends money from your checking account.
- Overdraft
- Spending more than your balance, which can cause a fee.
- Interest / APY
- The price of money / the yearly interest a savings account pays.
- FDIC / NCUA
- US agencies that insure bank / credit union deposits.
- Phishing
- Fake messages that try to steal your login or card details.
What's next
A savings account keeps money safe and grows it a little. Investing can grow it more, with more risk. Go to Lesson 5: Intro to investing →