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In general terms, banks work by taking the money that people deposit with them and using that amount as a base number for a formula to establish the amount of money they can create out of thin air, and then loaning that amount out to businesses or individuals and charging them interest on the loans. This is called fractional reserve banking. They pay you a much lower rate of interest for depositing (or, in effect, loaning) your money to them, and the difference between the amount they pay out in interest on deposits, and the amount they charge in interest on loans, is what the bank takes in as profit. Out of that profit comes all their various expenses, but when you consider that the total annual profit for American banks generally tops $160 billion, then you can see that banks make a LOT of money. Not all of the income they generate comes from interest, however. A great deal of it is made by charging you a fee for accessing your own money, and for charging administration fees for loans, term deposits, retirement accounts, lines of credit, and many other types of transactions. Banks are enmeshed in every aspect of our lives, from our basic everyday purchases, through our mortgages, loans, and credit cards, and on to our hopes for a comfortable retirement.

Choosing which bank to deal with can sometimes be a daunting task, unless you live in a small town with only one or two choices. Banks appear to offer a bewildering number of different types of accounts, different credit cards, different perks and different incentives. In reality, you will usually find that the only real differences are in the names and the hype. When you have chosen your preferred bank, then it is time to go in and open an account, right? Not necessarily. Many banks offer the option of signing up for an account online now. This option is usually reserved for those with good credit, though, and does not allow you to explain any small snags in your credit rating. Many people also feel that dealing with a machine is a much different proposition than dealing with a human being, so they may prefer the personal touch. Before you sign the papers, you should always make sure that you understand the rules relating to your account, the fees and costs associated with it, and the penalties for not staying within the rules. Whichever method you use to open the account, you must remember to keep your information for that account in a safe place, and never write your password or PIN down anywhere where it could be found by others. It is best to only have it in your head – that way it can never be stolen without your knowledge.

They type of account you should open depends very much on what you plan to do with that account. If you simply want somewhere to park your extra money so that you will have it for a rainy day, a basic savings account will probably do the job. In fact, some people open multiple savings accounts in order to save for different goals – one account for vacations, one for a down payment on a house, one for new furniture, and one for Christmas gifts, say. The possibilities are endless, but the accounts are all basically the same. Most savings accounts in North America right now pay you almost nothing in interest. It is common for them to offer 0.10 % in interest, so your savings will earn you very little money.

Checking accounts are the accounts that you would use for your everyday transactions. Today, even though they are called checking accounts, actually writing checks is becoming an obsolete practice. Debit cards are much quicker and easier to use, so checks are usually only used for transactions where a debit card cannot be used. Your checking account needs to fit your buying habits, so you need to think carefully about things like how often you use your debit card, how many times you would use an ATM in a month, and how many checks you might write. Then you need to compare the different checking accounts and choose the one that best suits your banking habits. Make sure you understand the fee structure, the costs for a bounced check or an NSF payment, and calculate how much that account will cost you every month. Those fees can add up, so make sure you know what you’re getting into.

Most bank accounts reward you greatly for having money. Strangely enough, banks tend to penalize you for not having any money, by charging you money. This does not help you have more money. The more money you have, the more perks you will get at the bank. Your savings will earn higher interest rates, your checking account will have fewer fees and lower charges, and the bank may offer you things like overdrafts and lines of credit. Do your research before accepting any of those things, though, because while they can be advantageous, they also have pitfalls.

At one time, there were few, if any, fees charged for normal transactions at most banks. That has changed drastically, and banks now charge a myriad of fees – some of them for such ridiculous reasons that you wonder how the law allows it. Almost every account you can possibly think of that any bank offers, comes with fees of some sort. Checking accounts have monthly fees, fees for using the ATM of a different bank, fees for using your debit card too many times, fees for using an overdraft if you have one (plus interest charged on the money you have used from your overdraft), fees for writing checks, and fees for too many withdrawals from a savings account. There are often exorbitant fees charged for writing a check when you don’t have sufficient funds in the bank to cover it, or when a pre-authorized debit is refused due to lack of funds. In the fine print of your contract you will most likely find the phrase “fees are subject to change without notice”, so it is important to keep track of your bank account so that you know what you are being charged every month.

The internet is a wonderful thing, but when it comes to keeping information secure, it could do better. Cybercrime has become so common and widespread that having your bank account compromised is nowhere near as unusual as it was before the advent of the internet. Before you get your bank account, it is a good idea to check out how that particular bank deals with cybercrime and its fallout. Find the part of your contract that details the rules regarding fraud or theft from your account, and make sure you understand what your rights are, and what your obligations are before you sign up for your account. Does the bank take responsibility if your account is hacked? What are you supposed to do if you notice money missing from your account? What happens if you cannot do that right away? Under what circumstances would you be held responsible for covering the costs of a theft from your account? Knowing all of these things can save you a lot of trouble later.

All the major banks now offer online banking, as well. This is a wonderful invention for those of us who remember the days when banks were open from 9:00 am to 3:00 pm Monday to Friday and it was impossible for a working person to go to the bank without taking time off work. Now you can bank at midnight in your pajamas if you choose, an innovation that would have raised eyebrows even twenty years ago. Now, online banking lets you pay bills, transfer funds between accounts, purchase checks, and generally manage your money without leaving home. It is a wonderful convenience for a great many people.

Bank statements

Years ago, you got your paper bank statement in the mail every month, with all of your cancelled checks included. Now, if you want a paper statement, you must pay a fee. Most people opt for an online statement, since you can see exactly what is happening with your money through online banking, and if you really need a printed statement you can print one off yourself. Whichever method you choose to receive your statement in, though, you should make sure you are aware of everything it says. Check each transaction and make sure it is yours, and report any that appear to be suspicious. Any errors or discrepancies should be reported to your bank immediately, since not doing so could be taken as proof that the transaction is acceptable to you. If you do get paper statements, keep them in a safe place, since your account number and banking information could be used by an unscrupulous individual to gain access to your account.
When dealing with banks, it is in your best interests to be knowledgeable about your accounts, and vigilant in keeping track of them.

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Credit Card Insurance Policies

As soon as you have a credit card, you will start receiving offers for insurance.  You will get calls from telemarketers, breathlessly describing horrific scenarios where the only thing between you and abject poverty is your credit card insurance policy, which will take effect the second you lose your job or become disabled by illness or accident, and will shower you with scads of money so that you can live like royalty until everything is all better.  Please.

It may sound like there are a lot of different credit insurance policies out there, but in reality there are only 4 different types: life insurance, unemployment insurance, disability insurance, and purchase insurance.  These policies are not actually offered by the credit card company, but by an affiliated insurance company which, like most insurance companies, is extremely prompt and reliable about collecting the premiums, but not so prompt or reliable about paying out any claims you have.

The type of life insurance policy you will likely be offered covers only the balance on your credit card at the time of your death.  This is probably the easiest policy to collect on, since even an insurance company has a hard time denying the validity of a death certificate.

The unemployment insurance policies usually only cover the minimum payment on your credit card for a maximum of 6 months, and there are so many conditions and criteria that must be met that I would say it is a rare person indeed who ever manages to collect on this type of policy.

The disability insurance policies are also designed to cover only the minimum payment for a certain length of time, and the insurance company will demand doctor’s reports, test results, and a ream of paperwork that is difficult, if not impossible, to obtain when you are ill or injured and not able to function at your best.

Purchase insurance, or property insurance, covers credit card purchases if they are damaged or stolen.  The burden of proof with these claims is very high, and people commonly give up in frustration and accept the loss rather than continue an endless battle with the insurance company.

In short, you would be better off to put money away in a savings account every month so that you can provide your own insurance against the uncertainties of life.  At least then you would know that you can collect that money when you need it.

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Credit Card Interest Rates

creditcard2Credit cards may be a convenient way to pay for things that don’t fit conveniently into your budget right at the moment, but too much credit can become a nightmare of endless payments and escalating debt.  In many cases, if you were to only make the minimum payment on your credit card debt, you would pay more than the amount of your original purchases in interest alone before you paid the debt in full.  Obviously, this is not an ideal situation and we would all like to avoid it if possible.  This is why you need to clearly understand how credit card interest works and how to use credit to your advantage as much as possible.

The average credit card charges about a 20% annual interest rate.  That can translate to thousands of dollars paid out in interest alone if you carry a significant balance on your credit card.  The longer you carry a balance, the more interest you will be charged.  In most cases, if you owed $1000 on your credit card, and you paid off $950 this month and planned to pay off the last $50 next month, you would get an unpleasant surprise when you received your next bill, because they will still be charging you interest on the full $1000 debt, not the $50 you still owe, and they will continue to do that until the full $1000 has been paid.  This might feel like a sneaky and unfair tactic on the part of the credit card issuer – and it is – but you won’t get anywhere complaining because it is clearly written out in the credit card agreement that you accepted their terms when you accepted the card.

The smartest way to use credit is to pay off the balance of your card every month.  Most cards have a grace period where they don’t charge you any interest – the grace period is usually 20 to 30 days – and if you pay the charges in full, you will not be charged any interest at all.  Sadly, the reason credit card issuers are among the richest companies in the world is that hardly anyone uses credit wisely.

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Store Credit Cards

creditcard3Store credit cards were originally issued by the stores themselves, and were not quite the same as regular credit cards.  In fact, they should more accurately be called “charge cards” because unlike a regular credit card where the credit card company pays the retailer for the item, and you pay the credit card company, store charge cards were simply an IOU to the store.  You had the merchandise, and you gave the store a promise to pay for it.  For this reason, stores only issued these cards to those with good credit ratings. These cards still exist, and are sometimes easier to obtain than a conventional credit card because the standards tend to be somewhat looser – after all, the retailer is eager for you to have a charge card from them, since it makes them money.

It is more common today to have a conventional credit card tied to a particular retail chain.  These are called co-branded credit cards.  These cards carry the logo of the retail chain, but are issued by a credit card company, who sets the credit limit – and credit limits on these cards are typically quite low –  and does all the administration related to the card, as well as charging the retail chain a percentage of their profits.  So the bank is earning interest and fees from the customer, as well as taking a commission and a percentage of the store’s profits.  It looks like the big winner there is the bank.

One of the advantages that a store card will often give you is a better deal initially than a conventional credit card.  They also may offer an extended interest-free term when you first get the card, or even a large discount on your first purchase with the card.  The disadvantages are that store credit cards are only accepted in that particular store or chain of stores, and can charge exorbitant interest rates.

As with all credit cards, your best bet is to know what you are getting into before you get into it, and always use credit wisely.

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Credit Cards with Points

There are dozens of different credit cards that will earn you points at various retailers or travel points or reward points of some type.  It is therefore unfortunate that nearly half of the people who use these cards are not well versed in how to actually get the rewards that the card promises.  In general, the basic credit card contract that you sign should be the real reason you chose to get that card, with the rewards points only a minor consideration.  This is because the rewards are most often far less spectacular than the advertisements would suggest, and are much more complicated to redeem.creditcard3

Some cards only allow you to earn a certain number of points each year, and the terms and conditions are usually “subject to change without notice” as well.  With some cards, your points are all forfeited if you are late with a payment, or miss a payment altogether.  There are cards where you must sign up for each week’s or month’s bonus deal before you are eligible to receive it, and if you don’t sign up on time you lose your eligibility.  Still other cards demand that you spend a certain amount every month before you are awarded any points.  The terms and conditions of these points cards can be confusing and annoying, and the rewards that you were led to believe would be yours very seldom live up to the hype.

You will usually be required to sign up for the points program online, and will need to provide your personal information and a password.  Then you will need to carefully read the information provided so that you understand how the program works and what you will need to do in order to receive your reward points.  You should check your points balance regularly, and check the site for bonus offers or changes to the program.  You may end up getting rewards that you enjoy, and that are worth earning, but you won’t get them without making an effort.

 

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Credit Card Gift Cards

creditcard2The purpose of the credit card gift card is to give the recipient a choice.  It does not limit them to one store, or one gift.  These cards can also be purchased by those who do not have conventional credit cards to make a purchase that cannot be paid for with cash or debit.  They are convenient, albeit expensive in some cases.  Most brands of gift cards charge a fee when they are purchased, and some charge a monthly fee if the card remains inactive for a certain length of time.  There may be activation fees, usage fees, maintenance fees, replacement fees and expensive exchange rates for foreign currency.  A gift card originally worth $100 can be whittled away surprisingly quickly, leaving the holder with a lot less money than the numbers on the card would seem to indicate.  It is always a good idea to research which card has the lowest fees before you make your purchase.

Some gift cards must be registered before you can use them, and others can simply be activated at the till at the time of purchase.  Those that require registration ask for your personal information and, as always, a password.  Creating this registration, however, allows you to check the balance remaining on your card online.

When you have a gift card, it is a good idea to use it promptly, since they all have expiry dates.  The expiry date doesn’t always mean that you lose the remaining balance, but it can be a lot of work to have that balance transferred to a new card.  Also, if the card remains inactive for too long, the issuer may begin to charge you a fee for not using it.  This fee is typically about $5 a month, so your card balance can disappear fairly quickly while you think you are saving that money for a rainy day.

Gift cards are widely accepted, but not universally as of yet.  There are still some retailers and online shops where they are not accepted, although they are becoming fewer.  At this time, a credit card gift card can buy almost anything you need it to

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Prepaid Credit Cards

Thercreditcard3e are some things in our world today that are difficult, if not impossible, to purchase without using a credit card. Airline tickets are a prime example. The only way to buy an airline ticket without a credit card is to go through a travel agent. You can pay the travel agent with cash or debit, and they use a credit card to purchase your ticket. Online shopping is also out of the question if you have no credit card, and while your bank account might be all the healthier for it, it can be inconvenient at times.
There are ways to get a credit card even though you do not qualify for a conventional Visa or Mastercard. You can use a prepaid credit card for almost any transaction necessary. A prepaid card works more like a debit card than a credit card, since you must preload it with money before you can use it to make purchases, and when the money runs out you cannot use the card until you load more money onto it.
There are many different brands of prepaid cards, but they all work on essentially the same principal. You preload the card, and then you pay fees for certain things that you do with the card. You don’t pay interest with these cards the way you would with a conventional credit card, but the fee system is often difficult to understand, and there are a significant percentage of companies issuing these cards that fail to fully disclose their fee structure at all. It is important to do some research and choose the best card you can get.
Prepaid cards can do far more than make simple purchases, though. They can work as a sort of bank account for those who don’t have a conventional bank account as well. You can choose to have your whole paycheck direct-deposited onto your card, or use it to transfer money from your bank account onto your card. There are some retailers that sell reload cards, so you could purchase a reload card and have it loaded onto your prepaid credit card right at the till.
In general, prepaid credit cards are not only becoming more popular and convenient to use, but they are being accepted in more places all the time.

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All About Credit Card

Credit cards are everywhere.  They are an integral part of the financial system we live with. 

Are they a good part of that system, or are they detrimental?  Well, that depends on where you look at the question from.  If you look at it from the point of view of the CEO of a credit card company, then they are the best things since sliced bread.  If you look at it from the point of view of the average credit card customer, they are the invention of the devil, but a handy thing to have.  And if you look at it from the point of view of the vast majority of retail outlets who have to take payment through credit cards, they are an expensive nuisance.  In any case, they are ubiquitous and annoyingly necessary unless you are a hermit.

Credit cards in their current form are a fairly new invention.  The first charge cards were used in the 1020’s, but were not widely used.  The credit card went through several different versions and styles of operation before today’s version was developed in the early 1970’s.

creditcard

In general, credit cards run on the principle that everyone wants money for nothing.  What a credit card does for us is allow us to believe that an item has been paid for when, in fact, it has not.  Intellectually, of course, we understand that the bill has not been paid, and the act of using a credit card constitutes a promise to pay for that item, rather than actual payment, but the human brain is not very rational when it comes to money and huge numbers of people charge vast sums of money without considering the cost.  That inability to consider the ramifications of using a credit card is the reason why so many people get in debt beyond their ability to pay, and end up in real financial trouble.  It is a good idea to learn as much as you can about the wise use of credit cards before you get one, and keep a close eye on your spending, your interest rate, and your ability to pay off the debt.

There are several different types of credit cards, and deciding which best suits your needs is not always easy.

To start with, there are prepaid credit cards.  The Financial Consumer Agency of Canada describes them as “an expensive way to spend your own money”, because after you purchase the card, you must apply your own money to create the credit balance of the card, and then you can spend that money.  If you need to buy an airline ticket, or shop online, and you do not qualify for a regular credit card, then this is a useable option.  It is an expensive one, though, since there are transaction fees applied to every purchase and often monthly fees are applied after a certain length of time.  On the other hand, these cards do not charge interest.

Secured credit cards are somewhat different from prepaid cards in that you often must place at least 100% (and sometimes as much as 200%) of the credit limit of the card in a savings account that the credit card company is granted access to.  This money acts as a guarantee that you will be able to pay for your purchases.  Some cards will ask for less than 100% of the desired credit limit as a deposit if your credit rating is deemed acceptable.  In any event, these cards require that you make regular payments, just as you would with an unsecured card, and that can allow people to run into trouble.  If you miss a payment, the credit card company will very likely raise the interest rate on your card and charge you additional fees.  If you continue to miss payments, the interest rate rises and fees increase dramatically.  This situation will be allowed to escalate by the credit card company because eventually – even though they take the deposit you gave them to get the card after a specified amount of time, usually 90 to 180 days – you will still owe money due to the interest charges and fees.  This is great for them, but not so good for you.

Unsecured credit cards are the most common type of card.  These cards are issued to those whose credit ratings are above a certain level that is determined by the card issuer.  The credit limit on your card is, they say, determined by a combination of your credit score, your credit history, and your income.  The limit will be raised at certain intervals by the credit card company if you have not missed or been late with any payments.  You can request a higher limit, but it is not always granted.  At first glance it would appear that there are hundreds of different cards to choose from – some offer reward points incentives with certain retailers, others give you travel points or cash back on purchases.  Some cards have an annual fee, others do not.  Some have extremely high limits, but you must have a very high income to qualify for the card.  In general, though, interest rates for purchases are about 20%, and for cash advances 23% or more.  Cards with an annual fee will often have lower interest rates if you carry a balance.  Credit cards come with purchase insurance in some cases, travel insurance in others.  There are accident insurance clauses, life insurance clauses, and cash back incentives.  It can seem difficult to choose between them at first, until you remember that they are essentially the same under the layers of fluff.  The basics that you need to know are the interest rate for purchases, the interest rate for cash advances, the annual fee, if any, and the amount and method of insurance coverage that comes with your card.  The incentives are usually less spectacular than the hype would indicate, but can add a little bit of enjoyment to using your card.  Just remember that spending a lot of money that you will have to pay high interest on, simply to get a tiny perk is probably not very fiscally responsible.  In many cases, it would be cheaper in the long run to just purchase the perk you want and save yourself the interest, rather than trying to spend enough money on your card to get that perk “free”.  Add it up – it’s not free.

One of the ways that a company gets you to apply for their particular card is to lure you in by offering a low introductory interest rate.  This may be wonderful in the beginning, but can be a nightmare when the introductory rate ends and the normal interest rate kicks in, as it can really increase your costs.  If you consider that it takes a few months, usually, to rack up a balance on your credit card, and you have spent six months making purchases and enjoying your artificially low payments, you will get an unpleasant surprise when you get your first bill after the introductory rate has expired, and it is too late to do anything about it.  If you get one of these cards, it would be wise to keep track of the interest rate and its expiry date and plan to have your balance down to a manageable level by that time.

 

If you have ever looked at a credit card contract, it is several pages of tiny print with so many clauses and convoluted sentences that the vast majority of people never read them in their entirety.  This is a good thing – for the credit card companies.  Not so much for the consumer, though.  The key information, such as interest rate and annual fees, is usually presented in a clear and easy to read information box on the contract, or at least with the contract, but the rest of the information is not so clear.  Even though it is difficult to get through, it is important to read your credit card contract fully so that you understand what your rights are and what your responsibilities are.

It is also important to read and understand your credit card bill every month.  You should always check the list of transactions and make sure that you did actually make all of those transactions.  Make sure that any payments that you have made show up on your bill as a credit.  And always look at the information included on your bill where it tells you how long it will take to pay off your balance owing completely if you only make the minimum monthly payment.  Your bill will also show the amount of interest charged.  This number should make you very cautious about carrying a balance on your card.  If you think about it, if you bought something for $1000, and you pay off all but $10 of that on your next bill, you will still be charged interest on the full amount.  That can get expensive, but you must understand that credit card companies aren’t in business to make you rich.

 

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