7 Financial Services in Your Daily Life: Managing Cash and Paying Bills

Simply put, cash management involves making sure you have sufficient money to pay bills each month and an emergency fund for unexpected expenses. In Chapter 3, you learned how to prepare a budget, which helps you to forecast your money needs. In this chapter, we will go over the nuts and bolts of implementing the budget effectively and applying best cash management practices to safeguard your money and minimize banking costs.

You interact with a large number of different financial institutions each day. Deposit institutions accept deposits, make payments on behalf of their customers, extend loans to consumers, and issue debit and credit cards. Credit companies provide loan service but do not accept deposits. Credit card brand companies facilitate transactions between consumers and businesses. Popular credit card brands include VISA, MasterCard, American Express, and Discover. While these companies manage the card brands, the credits are issued by banks and other financial institutions. FinTech firms develop online and mobile apps that allow you to conduct financial transactions. Some of these firms are part of financial institutions. Others are part of technology companies and some are standalone companies partnering with financial institutions.

Alternative finance companies offer financial services that are not subject to the same level of government oversight as regulated institutions. These include payday loans, Buy Now Pay Later (BNPL) services, Buy Here Pay Here (BHPH) car financing, rent-to-own contracts, check cashing outlets, pawn shops, and car title loans. These services typically have very high and hidden costs, potentially trapping consumers in cycles of debt. They tend to prey on less knowledgeable consumers or those who have limited access to regulated financial institutions.

Long ago, before 2000, different financial services were provided by separate institutions regulated by their respective state and federal government agencies. Conglomerates were not allowed. Conglomerates are holding companies that own subsidiaries encompassing multiple types of financial institutions under a single brand name. The reasons for these separations and regulations were due to painful lessons learned in the stock market crash of 1929, which spread to banks and eventually led to the great depression that lasted 10 years. Financial deregulations began in the early 1980s and culminated with the Financial Services Modernization Act of 1999. These changes removed many regulations, paving the way for mergers, consolidations, and expansion. As a result, conglomerates are now the dominant form of financial institutions. Figure 7.1 shows the top 10 financial institutions in the U.S. in 2024 based on total assets. They are all conglomerates. You will likely interact with one of them in your daily life.

Managing Your Daily Financial Needs

The first step in cash management is to choose a deposit institution and open a bank account. Having a bank account provides a number of benefits. First, your money is safe. Without a bank account, you will need to keep your money as cash, which can be lost or stolen. There are two main types of deposit institutions. The first type includes commercial banks and savings & loans and most are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per customer per institution. The FDIC was created in 1933, following a cascade of bank failures leading to the great depression, resulting in many people losing their life savings even though they did not speculate in the stock market. Since FDIC insurance began in 1934, no consumers have lost their insured deposits due to bank failure. The second type of deposit institution is credit unions, which are nonprofits that serve their members and most are insured by the National Credit Union Administration (NCUA) up to $250,000 per depositor per institution. The NCUA functions similarly to the FDIC.

In general, commercial banks are larger, often part of a conglomerate, and have more physical locations nationwide. Savings & loans tend to be regional and have a stronger focus on consumer loans, especially home mortgages. Credit unions are cooperative financial institutions and its depositors are members, sometimes with voting rights. Due to its nonprofit organizational structure, credit unions tend to have lower interest rates on loans, lower account fees, and offer higher interest rates on deposits. Though usually regional, many credit unions are part of the Co-op Shared Branch Network that allows members to conduct transactions, including ATMs (Automated Teller Machines), at any participating branch nationwide without fees. Credit unions are usually not part of a conglomerate and have a focus on the community. Online only banks, as the name indicates, do not have physical branches and are often part of a conglomerate. Since they have fewer expenses by not providing in-person services, they compete by offering lower fees and higher interest rates on deposits. Since financial deregulations in the 1990s these institutions have become more alike and their unique identities have become less distinct. We will use the word “bank” to refer to all deposit institutions in the rest of this chapter.

A checking account makes paying bills, transferring money to friends and family, and online purchases much easier and safer. The Electronic Fund Transfer Act (EFTA) of 1978 limits the consumer’s liability to $50 if an unauthorized transaction is reported to the financial institutions within two business days, and to $500 if reported within 60 days. After 60 days, you will be responsible for the entire transaction amount. The EFTA protection covers debit cards, ATM transactions, online and ACH transfers, direct deposits, online payments, and online or mobile banking activities but not paper checks. Without a checking account, paying bills can be cumbersome and costly. In addition, unlike paying with cash, you have proof of payment on your monthly statement. You do not need to pay check cashing fees to cash your checks if you have a bank account. You can get your money faster if you use direct deposit. Not having a bank account, called unbanked and underbanked, is expensive and inconvenient.

When you apply to open a checking account, the bank will require a government-issued photo identification, social security number, and proof of address such as a rental agreement or utility bill to verify your identity. If you are under 18, you will need a parent or guardian to open the account on your behalf and act as the custodian until you turn 18. Similar to lenders reviewing credit reports to evaluate a loan applicant, the bank will typically request a report from ChexSystems, which collects and reports information on checking accounts. Your checking account application may be turned down if there are many negative actions like bounced checks or unpaid overdrafts. Under the Fair Credit Reporting Act you have the right to request one free report from ChexSystems every 12 months and correct any errors. Appendix 7.1 contains a sample report and contact information for ChexSystems. Lastly, you must have money to deposit into the account.

Factors to Consider When Choosing a Bank

The key factors to consider when choosing a bank include safety, fees, minimum balance requirements, online banking and mobile app, convenience, and access to other financial services. You should always choose an institution that is FDIC or NCUA insured. Banks typically display the FDIC or NCUA logo prominently. You can also look up a bank’s insurance status on FDIC.GOV or NCUA.GOV.

Another important consideration is fees. You do not want banking costs to eat up your hard earned pay. A $25 monthly fee means $300 per year! Some banks offer free checking accounts with no requirement. Others require a minimum balance or a direct deposit to waive the account maintenance fee. Many banks offer special accounts for students, seniors, or military personnel with lower or zero fees. At the same time, you should choose a bank account with services that are important to you. Take a moment to review your daily life to see when and how you use various bank services.

According to the 2024 survey by the American Bankers Association, mobile apps are the most often used banking method, followed by bank websites, and visiting branches in person or using an ATM. This trend is even more evident in younger generations (Figure 7.2). If mobile banking is important to you, then you should choose a bank that offers the service. An important and useful feature of mobile banking is transaction alert, which helps you detect any unauthorized activities early. Even if you plan to conduct most of your banking activities on your phone or online, it is a good idea to select a bank that has a physical branch located near your home or place of work or school for a number of reasons. First, using your bank’s ATM will ensure you will not be charged out-of-network fees. Second, it is easier to resolve issues in person, especially when you are new to managing money. Lastly, you may need other services that must be conducted in person. Many banks offer free notary service, foreign currency exchange, and cashier’s checks and money orders to customers at low or no cost. For example, most landlords and rental agencies require the security deposit along with first and last month’s rent be paid by cashier’s check. Do you need other financial services besides banking? Banks that are part of a conglomerate often have an integrated website or mobile app that allow you to manage your investments in addition to banking activities. The relative importance of these additional services depends on your personal needs, which may change over time. When your financial needs are relatively simple, credit unions may be the best option because they tend to provide friendly, low cost, though limited service. Later, you may need more complex services, such as investing in mutual funds, managing your retirement accounts, or supporting frequent international travels. At that time you may find a commercial bank that is part of a conglomerate a better fit. Once you have selected a bank, the next step is to decide on the bank accounts.

Types of Bank Accounts

The four main categories of bank accounts are checking account, savings account, money market account, and certificate of deposit. After financial deregulations the boundaries between the different categories are less distinct. If the bank is FDIC or NCUA insured, then all these accounts are insured as well. Note that the $250,000 limit applies to each consumer per bank, not per account. Within each category there are a variety of features, which involve trade-offs between minimum balance, account maintenance fees, interest rates, transaction limits, ATM fees, overdraft fees, etc. Let us take a moment to look at these accounts and their features from the banks’ perspective and the trade-offs will be obvious. The banks generate revenues by charging fees or by using your deposits to fund loans to other customers. The more money you deposit, the higher the banks’ revenues. It costs the banks money to provide features, including offering interest on your deposits. Therefore, accounts with higher minimum balance will have lower fees, more features, and higher interest on deposits. Choosing the right accounts means matching your daily financial needs to the account features.

Checking Account

The primary purpose of a checking account is to facilitate payments. Most checking accounts come with debit cards, paper checks, and ACH transfers (electronic checks) as payment options. Debit cards also function as ATM cards. Checking accounts accept cash and paper check deposits and ACH transfers, including direct deposits. Watch out for fees, including account maintenance fee, ATM fee, overdraft fee, and other transaction fees. Some banks waive account maintenance fee if you maintain a specific minimum balance or if you set up direct deposit into the account. Many banks charge a fee for paper statement delivery. Most checking accounts do not earn interest.

An important feature to consider for checking accounts is overdraft protection, which prevents transactions from being declined due to insufficient funds in your checking account. The specific overdraft protection arrangement varies by bank and by account type. One common arrangement is to link your checking account to your savings account or money market account. When there is not enough money in your checking account, funds will be automatically moved from these linked accounts to cover the overdraft amount. Some banks offer overdraft protection as a short-term loan, in which case you will pay interest on the loan in addition to the overdraft fee. The benefits of having overdraft protection include avoiding insufficient fund fee and adverse payment history. The downside of using overdraft protection include fees and interests, spending beyond your means, and accumulating debts that you are unable to repay. Linking to your other accounts also exposes all your money to potential thefts and scams. The best strategy to avoid insufficient funds is to keep track of your bank balance and transactions, especially recurring automatic bill payments. It is important to remember that check deposits, unlike direct deposits, take a few days for the money to be available.

Exercise 7.2 A Tale of Three Checking Accounts

Jordan just celebrated a big milestone, turning 18, which means the ability to vote, not to mention graduating high school in a couple of months and starting college in the fall. It also means time to open an independent checking account. Jordan currently has $2000 in a minor’s account that will be transferred to the new account. Figure 3 shows three checking accounts from BBank. Additional information, including the footnotes, on these accounts are included in Appendix 7.2. The BBank Total Checking account will waive the monthly service fee with monthly direct deposit of at least $500 or a daily balance of at least $1500. The BBank Secure Checking account will waive the monthly service fee with monthly direct deposit of at least $250. The BBank Premier Plus Checking account will waive the monthly fee with minimum daily balance of $15,000 in combined accounts or a BBank mortgage with automatic payment. Jordan planned to work full-time during the summers and part-time during the school year. Full-time pay would be around $3000 per month and part-time pay would be around $500 per month.

1. Which checking account would you recommend for Jordan?
2. What are the top 3 reasons for your recommendation?
3. What additional information would you like to know before making a recommendation?
4. Review the footnotes (fine prints) in Appendix 7.2. Identify the differences in the overdraft policies between BBank Total Checking and BBank Secure Checking.
5. Reflect on your experience of reading the footnotes.

Savings Account and Money Market Account

Savings accounts, high yield savings accounts, and money market accounts are all good vehicles for investing excess cash and your emergency funds. These accounts accept all forms of deposits. Savings accounts typically require a low minimum balance, low account maintenance fees, but offer a lower interest rate on your deposits. High yield savings accounts are the same as savings accounts except they offer a higher interest rate and usually require a higher minimum balance. Some banks offer tiered savings accounts with interest rates linked automatically to your account balance. Money market accounts provide more features than savings accounts, including debit card, online payments, and often checking writing. They offer higher interest rates than basic savings accounts and require a high minimum balance, often at least $2500, to avoid maintenance fees. In many ways, a money market account is like a checking account that pays interest. Note that some banks limit the number of transactions per month for free on money market accounts so it is important to check the fine prints.

Certificates of Deposits

Certificates of Deposit (CDs) usually provide a higher interest rate than savings accounts but require the money to be invested for a fixed time period with a penalty for early withdrawal. Therefore money invested in CDs is not as readily available for immediate use. The fixed time period (called maturity or term) ranges from 30 days, 6 months, to multiple years. The interest rate on the CDs is also fixed during that time period. Interest rates on savings accounts and money market accounts change with market interest rates.

CDs are generally considered safe investments because they are insured by FDIC or NCUA up to $250,000. They are a good option for short to intermediate-term savings goals. The biggest downside risk associated with CDs is the penalty for withdrawing funds before the maturity date. Therefore, it is important to forecast your financial needs before investing excess cash into a CD. Some banks offer no-penalty CDs which pay a lower interest rate. Another factor to consider is interest rate risk. If interest rates in the market rise substantially during the term of a CD, you may find yourself locked into a lower rate. Conversely, if interest rates fall, you will benefit from having secured a higher rate. The trade-offs between savings accounts, high yield savings accounts, money market accounts, and CDs are minimum deposit amount, flexibility, and interest on deposits. Figure 7.4 shows a bank’s promotion on savings accounts and CDs, which illustrates the trade-off between flexibility and interest rate on the deposits. Notice that the bank advertises the APY (Annual Percent Yield) on deposit accounts. Chapter 5 explains the definition of APY and how it is different from APR.

Many banks automatically renew your CD at the same term at the new market rate when it matures. This feature can potentially be costly. Once the CD is renewed, you are locked for another term and will need to pay the early withdrawal penalty to use the money. Some banks renew CDs at a less competitive rate than what they offer new customers. Before the maturity date, the bank is required to notify you. Make sure you request your CD not be automatically renewed and make the request before the maturity date. You should review your financial needs and investment options before deciding whether to invest in another CD. You can also purchase CDs through a brokerage firm. These CDs tend to have a higher minimum purchase requirement but also offer higher interest rates. Be sure to check whether they are insured by FDIC.

Different Ways to Pay Bills and Receive Money

How often do you find yourself with little to no cash on you? Americans are paying with cash less and less often. According to the 2024 Diary of Consumer Payment Choice, Americans paid with cash 15 percent of the time in 2023, down from 30 percent in 2016. Cash payment is colored blue in Figure 7.5. Even though cash is becoming less popular as a form of payment, it is important to have cash at home, especially in case of emergencies, including power or network outages. A useful rule is to have enough cash to fill up your car plus two to three days of expenses.

Credit cards and debit cards were the most common form of payments, totaling over 60 percent (yellow and green respectively in Figure 7.5). Electronic transfers, usually referred to as ACH transfers, have also gained popularity. ACH transfers are often used for recurring automatic payments such as rent, utilities, streaming services, and membership fees. More and more businesses offer discounts for ACH payments and charge a processing fee for credit card payments. Paper checks have become less and less popular (red in Figure 7.5). Other payment methods include prepaid cards, money orders, and travelers checks.

Credit Cards and Debit Cards

The most important difference between a credit card and a debit card is that one is a short-term loan and the other is not. When you pay with a credit card, the issuing bank is loaning you the money, which you need to pay back when you receive the monthly statement. Some credit cards are store specific (called merchant card or proprietary card), which means you can only use them to make purchases at the specific store. Examples include department store and gas station cards. Most credit cards are general purpose and can be used at any store accepting the card brand, such as VISA or American Express. Recall from Chapter 6 that credit card loans are from the issuing banks, not the store or the card brand. When choosing a credit card, the important characteristics to consider include annual fee, interest rate, credit limit, cash advance terms, and other features such as rewards or cash back. It is best to choose a credit card that has no annual fees. Prestige cards (gold, platinum, sapphire, etc.) are seldom worth the expensive annual fees. Watch out for advertised low “teaser” interest rates that last only a few months. The credit limit is not how much money you have to spend. It is the maximum loan amount the bank will extend to you on the credit card. To improve or maintain your credit score, keep your spending to less than 30 percent of your credit limit. You can monitor your credit usage easily by reviewing your statements, charges, and payments online.

Most credit card companies offer a grace period on regular purchases when you have zero balance on your credit card. A grace period means you do not have to pay interest on purchases until you receive your statement. The exception is cash advances, which means using a credit card to get cash. Cash advances typically have additional fees, a higher interest rate than regular purchases, and do not have any grace period. That means interest starts accumulating the moment you take out cash. Cash advances are an expensive way to get cash. If you do not pay off the entire statement balance, the issuing bank will start charging interest on the average daily balance. This means that new purchases will no longer have any grace period when they are added to the outstanding balance. The average daily balance is computed as a weighted average. The following example illustrates how banks compute average daily balance and interest charges.

Example: Sam’s First Credit Card

Sam was excited to have their own credit card. They had been working at a coffee shop over the summer and would be starting college in the fall. The credit card was another sign of their independence. It was also convenient for their back to school shopping. Due to limited credit history, the APR on the card was 25 percent. Sam knew they had to be careful to avoid paying interest. In July, Sam spent $245 on the credit card and paid off the entire balance when the statement came. In August, Sam spent $200. Unfortunately Sam forgot to pay the credit card bill in the middle of moving into college. Sam got a late payment notice with a $50 late fee on September 5. They paid the $250 right away. Sam spent $300 on books on September 15. When the September statement arrived, Sam was surprised to find that interests were charged on the $300 purchase.

Sam reviewed the statement to understand how interest charges were computed. The bank computed the average daily balance for September as follows (Figure 7.6).

The average daily balance = ($250 x 5 days + $0 x 10 days + $300 x 15 days) / 30 days = $191.66

Finance charges = $191.66 x .25 / 365 days x 30 days = $3.94

Sam was not happy about paying the late fee plus the interest. It was another lesson learned. Sam set up a recurring reminder on their calendar 5 days before the end of each month to pay the credit card bill.

Credit cards that offer rewards, especially cash back, is a nice feature to have provided the rewards match your spending habits and do not come with high fees. A credit card is a convenient and safe method of payment if you pay off the balance every month and choose a card with zero or low annual fee.

When you pay with a debit card, money is taken out of your checking account right away. Unless you have overdraft protection, you will not be able to pay with a debit card if you do not have sufficient funds in the checking account. You are less likely to overspend with a debit card. Since a credit card is a loan, using a credit card will help you build your credit history. As explained in Chapter 6, when you use a credit card, you are protected by the Fair Credit Billing Act (FCBA) for unauthorized and disputed charges. Unauthorized and disputed charges include billing errors by merchants and charges for items and services not received or rejected by the consumer. Use of a debit card is protected by the Electronic Fund Transfer Act (EFTA) against unauthorized transactions but not against disputed charges. In other words, both credit cards and debit cards are protected against thefts but only credit cards are protected against bad merchants. Therefore, a credit card is a better choice for online purchases, especially from less well known vendors. The biggest downsides to using credit cards are the potential to overspend, accumulate debt, and incur interest expense.

If your credit card or debit card is lost or stolen, you should report the incident right away to the police and the bank, and follow up in writing to the bank with a copy of the police report. If you report the loss before someone uses it, it becomes the bank’s responsibility to stop unauthorized transactions and you are not liable for the criminal’s activities. If someone already used the card before your report, the protection is different for credit cards versus debit cards. Under FCBA, the maximum you are responsible for with a stolen or lost credit card is $50 and you have up to 60 days from the date the wrongful charges appear on your statement to file a report. With a debit card, the EFTA limits your liabilities to $50 if you report the loss within two business days, and to $500 within 60 days from the date of your checking account statement. You are responsible for all losses after 60 days of your statement with either cards. However, with a debit card, the funds are immediately withdrawn from your checking account and any linked accounts, such as those linked for overdraft. Criminals can clean out all your money and you must wait for the bank to investigate to recover any stolen amounts. The bank generally has 45 days to resolve the issue but it may take much longer if the criminals move the stolen money outside the U.S. or into cryptocurrencies. With a credit card, once you file a dispute, you do not have to pay the disputed amount until the credit card issuer finishes the investigation, usually within 90 days. If your credit card or debit cards are not stolen or lost but criminals gain access to your card information in other ways, such as data breaches, you are still protected against unauthorized transactions if you report the incident within 60 days after you receive your statement. The best way to protect against thefts is to keep your debit and credit cards in a safe location and set up transaction alerts. If you discover unauthorized uses, file a police report and alert the bank and credit card company right away. These laws protect you against unauthorized charges, which are thefts, but not against scammers who trick people into sending them money or gift cards under false pretenses. When you send funds to scammers, you initiate the transfers, making them authorized transactions. Scams are illegal and you should report them to the police. Banks and credit card companies are not obligated to investigate scams.

Prepaid Debit Cards

Prepaid debit cards are a special form of debit cards. These cards have money loaded on them and are not linked to bank accounts. Store gift cards are an example of prepaid debit cards. You can use these gift cards only to purchase items at the store. Some prepaid debit cards are general purpose cards and can be used at any place that accepts the card brand. This means you can use a VISA prepaid debit card at any store that accepts VISA, and so forth. Some prepaid debit cards can also be used to get cash from ATMs. An employer can pay its employees with a prepaid card, called a payroll card. Some state and federal government agencies use prepaid cards to pay Social Security benefits, veterans’ benefits, unemployment benefits, child support, and other government benefits. The cost of using a prepaid debit card varies significantly. Many have initial activation fees, monthly maintenance fees, transaction fees, and fees for loading and withdrawing cash. Some even charge inactivity fees if the card is not used for a certain period. Figure 7.7 shows the fee structure for a general purpose prepaid card from NetSpend and Figure 7.8 shows the fee structure for a benefits card from the state of Michigan. Notice the huge difference in fee structures.

Since store bought prepaid debit cards do not have any personal information by default, you have no recourse if they are lost or stolen. They are just like cash. You can register your general purpose prepaid card by providing personal identity information, including your name, phone number, and social security number. For a successfully registered card, you are protected from unauthorized charges if you report the incident within 2 business days, similar to regular debit cards. Prepaid debit cards do not provide monthly statements so the 60 day limit does not apply. If the bank issuing the prepaid debit card is FDIC or NCUA insured, then the registered prepaid debit cards are also insured up to $250,000 against bank failure. If you use a general purpose prepaid debit card, it is well worth taking the time to complete the registration process for these protections.

Paper Checks and ACH Transfers

You can use paper checks and ACH transfers to pay and receive money. Even though paper checks have diminished in popularity, it is still used quite a bit in business and you should know how to use them. Figure 7.9 shows a typical paper check. Notice the numbers printed at the bottom of the check. These numbers are very important. The number on the bottom left is the bank’s routing number. This number is unique for each bank and the information is public. The number in the middle is your checking account number. This number is unique to your bank account. Criminals can use this number to gain access to your money. You should protect your bank account numbers and paper checkbook with at least the same level of precautions as you would your credit card and debit card numbers. The number to the right is the check number and you can use it to keep track of your payment record. To write a check, you specify the date and the name of the recipient, called the payee. In addition to writing out the dollar amount in numerals with two decimal places, you also need to write out the amount in words. Finally, you must sign the check. Your signature authorizes the bank to take money out of your checking account for the payment. To ensure that your payment arrives on time, you need to mail your payment at least 10 days before the due date to factor in mailing time and check clearing time. First class mail is typically delivered within 3 to 5 business days. Once the business receives your check, it can take 3 or more days for the check to clear, which means the money is moved from your account to the business. Until the check clears, your bank balance will not reflect that a check has been written. It is important to keep track of paper checks that have not been cleared to avoid thinking you have more money than you actually do!

Do you know what to do if you receive a paper check? To use the money from the check, you need to endorse it before depositing it in your bank account or cashing it. First, verify your name is spelled correctly and matches the name you use for your bank account. The date should be accurate and within six months. Of course, the amount should be correct. You endorse a check by signing your name on the back of the check’s endorsement area. Figure 7.10 shows several types of endorsements. The most common ones are restrictive endorsements. To restrict the check to be deposited, write “For Deposit Only” on one line and sign below it. Present the endorsed check to a bank in-person or via an ATM and the money will be deposited into your bank account. To use your bank’s mobile deposit app, write “For (bank name) mobile deposit only” on one line and sign below it. Follow directions on your bank’s mobile app to upload images of the check. An unrestricted or blank endorsement is when you simply sign the back of the check. It is the least secure way to endorse a check because it can be cashed.

After you deposit an endorsed check, you may not be able to use the money right away. Remember that until a check clears, the money is in transit in the banking system. The Expedited Funds Availability Act (EFAA) requires banks to disclose their fund availability policy to consumers. The EFAA also sets the minimum amount of deposits banks must make available to customers over specific time frames. Banks can make more funds available sooner than the EFAA requirements. Each bank’s policy is unique. So be sure to read your bank’s fund availability policy, paying special attention to its cutoff times and definition of business day. Banks can set the cutoff time as early as noon for ATMs and 2 pm for in-person transactions according to EFAA. There is no federal regulation dictating mobile deposit cutoff times. Any deposits received after the cutoff time is considered to occur on the next business day. Note that Saturday is not a business day even though a bank’s branch may be open. The following are common policies many banks follow. In general, direct electronic deposits are available on the same business day or the next business day. Cash, U.S. Treasury checks, checks drawn on the same bank as the recipient’s, and the first $250 of a check from another U.S. bank are usually available the next business day if the deposit is made in person or at the bank’s own ATMs. Yes, you read that right, even cash may not be available for use right away. Remember that EFAA sets the minimum amount and maximum time. Banks can choose to make funds available sooner. If you use an ATM not owned by your bank, it may take 5 business days after the deposit is made. If your account is new, these rules do not apply and your deposits may take a bit longer to become available. Understanding your bank’s fund availability policy enables you to better plan how to deposit your money and avoid unpleasant surprises.

Instead of writing and mailing paper checks, you can use your bank’s online and mobile bill pay service. Many banks allow you to categorize your online payments and download transaction history, which will make your budgeting process a lot easier. Another advantage of online and mobile bill pay is that your bank will subtract the pending payments from your available balance so you do not have to keep track of outstanding checks. Your bank will require you to sign an agreement, which lays out the terms and conditions for online and mobile bill pay service. Pay special attention to applicable fees, restrictions, payment timing, and who is liable for errors. Once you sign the agreement, you give the bank authorization to withdraw funds from your checking account. The bank may make the payment using a paper check or an ACH transfer. When you add a company as a payee, the bank will give you a list of companies to choose from. If the company you want to add is on the list, the bank will usually send the payment via ACH transfer. Many major companies such as internet providers, credit card companies, national retail stores, and insurance companies are on these lists. If the company or person you want to pay is not on the list, you need to provide the bank with the name of the recipient, their complete address, and phone number. The bank will generate a paper check using information you provide and mail the check to the recipient. It is your responsibility to monitor the payment status to ensure that your bills are paid on time. ACH transfers eliminate mailing time and typically take 1 to 3 business days for the transfer process to clear, much faster than paper checks. Note that some banks may have a daily and monthly cap on how much money you can move using ACH transfers. Usually you cannot use ACH transfers to send money outside the U.S..

In general, paper checks are less secure than ACH transfer because of mail theft. Criminals can steal the checks from your mailbox or your recipient’s mailbox. If your recipient is not on your bank’s list of business, you can still set up ACH transfer to pay them. One option is to obtain the recipient’s bank routing and account number, account type (checking or savings), and whether it is an individual or business account. Use your bank’s online or mobile transfer fund service to send the money. Some banks may charge a fee to send money to an account at a different bank, called external ACH transfers. There is usually no fee for receiving money. In fact, when your employer pays you via direct deposit, they are using ACH transfers to send your pay to your bank account. When you set up direct deposit with your employers, they may ask you to provide a blank deposit slip for a savings account or a voided check for a checking account to verify your bank’s routing number and your bank account number. A voided check is a blank check with the word “VOID” written on it. Figure 7.11 shows a sample direct deposit authorization form. Some employers allow you to split your paycheck to be deposited into more than one bank account.

Another option to pay via ACH transfer is to provide your banking information to the recipient. Some businesses even offer discounts to customers for paying with ACH transfers, especially for recurring automatic payments such as rent, mortgage payments, and subscription services. You will need to sign an ACH authorization form which gives the business permission to electronically take money from your bank account when your payment is due. Businesses have incentive to have customers pay with ACH transfers because the processing fees are usually cheaper than credit cards and until you cancel the authorization, there is no expiration date. The advantages to the consumers are that they will not accumulate debt and their payments will be on time provided there are sufficient funds in the checking account. The disadvantages are that the businesses have your banking information and you are not protected against bad business practices. If criminals gain access to your banking information, they could steal all your money. For recurring automatic payments, you can cancel the ACH authorization by calling and writing to the company and your bank. Appendix 7.3 contains sample revocation letters suggested by the Consumer Financial Protection Bureau (CFPB).

Stop Payments

If you discover that a paper check is lost or stolen or that you have made a mistake, you can ask the bank to stop payment on the check before it is deposited or cashed. To stop payment on an ACH transaction due to your mistake, you need to contact your bank at least three business days before the scheduled payment date. The fee for a stop-payment order ranges from $20 to $30 per paper check and much lower for ACH transfers. Since paper check transactions are not covered by EFTA, there is no limit to your liabilities due to theft once the check is cashed. If your checkbook is lost or stolen or if your checking account number is compromised, it is cheaper and more secure to close the account and open a new one.

Peer-to-Peer (P2P) Payment Systems and Digital Wallets

Peer-to-peer (P2P) payment apps allow individuals to electronically transfer funds to one another without needing to know each other’s banking information. For you to conduct financial transactions on a P2P payment app, you and the recipient must have the same app. What distinguishes these systems is their speed and ease of use. It is much more convenient for two friends to download the same app than the alternatives, such as sending checks or entering routing number and account number into a bank’s app. Fund transfers between individuals appear to happen almost instantaneously. These apps’ user-friendly design masks complex financial transactions behind the scenes on these systems. You should have a basic understanding of how P2P payment systems operate so you can protect your financial well-being. It is important to distinguish a digital wallet from a P2P payment app. A digital wallet stores your credit and debit card information. Instead of using a physical card to pay at stores or entering your credit card information online, you use a digital wallet app. No money is transferred into the digital wallet, just the card information. There is no regulation governing P2P payment systems or digital wallets. Your data privacy and security depends solely on the discretion of the app providers. Whether your money in these apps are insured against bank failure and whether purchases made through them are protected depends on the legal entities operating behind the scenes and how they are structured.

In general, you can use a P2P payment app by linking it with your bank account or your credit card or debit card. Some of these apps even allow direct deposits. If you use your bank account or debit card to provide money to the P2P payment app, you authorize ACH transfers in the user agreement. This ACH authorization allows the P2P payment app to move money in and out of your bank account or debit card. If you use a credit card, your credit card issuer often treats the transaction as a cash advance and will charge you cash advance fee and interest. When you have a balance on a P2P payment app, how that money is stored depends on the app provider. Some store the money in its own system, which is unregulated and offers no protection against unauthorized charges or bankruptcy. Others store the money in a virtual prepaid debit card. If you register the P2P payment app account, the money in it will be treated as fund balance on a registered prepaid debit card. If the bank that issues the virtual prepaid debit card on behalf of the payment app is insured by FDIC or NCUA, so will your app balance, up to $250,000. You are also protected against unauthorized charges provided you report the incident within 2 business days. If you do not register your P2P payment app account, the funds will be treated as an unregistered prepaid debit card and there is no protection against unauthorized charges or bank failure. You can transfer funds from the P2P payment app back to your linked bank account or debit card.

If your app account is compromised and it is linked to your bank account, criminals now have access to all your money in that account and any accounts that are linked. After reporting to the police, you should notify the P2P payment app, the issuing bank used by the app, and your bank. Figuring out the legal liabilities can be challenging. The unauthorized charges, which is a theft, occur at the app. Technically no theft occurs at your bank. The transfer from your bank account to the app is authorized when you sign the user agreement. If your app provider uses a virtual prepaid debit card to store funds and your app account is registered, you have protection provided you report the theft within 2 business days. If it is not, then you are likely to be responsible for all losses. The social feature of some P2P payment apps makes them especially appealing to scammers. When criminals compromise your account or your friends’ accounts, you may be tricked into sending them money because they show up as your friends. Remember that current consumer financial protection laws do not protect against scammers if you are tricked. Criminals can also steal money by gaining physical access to your unlocked phone. If you choose to link a bank account or debit card to a P2P payment app, you should set up a separate account for that purpose and keep a low balance in that account. You can also delete the bank account or debit card information from the app after each use. The key is to limit the amount of money that criminals could access.

Some P2P payment apps partner with a single financial institution for each service and the financial transactions are handled by these institutions. One example that uses this structure is Apple. Apple Payments Inc. is the legal entity that is responsible for transmitting the activities but does not hold your funds or make loans. To send money to another individual, you use Apple Cash, which is a virtual prepaid debit card issued by Green Dot Bank, even though it carries the Apple name. Green Dot Bank is regulated. You need to register your Apple Cash account to qualify for FDIC insurance and other consumer protection. Apple Wallet is a digital wallet mobile app. You can store your credit cards and debit cards information in it, including Apple Cash. Apple Payments Inc. and Apple Wallet are unregulated. When you use a credit card stored in the Apple Wallet to make purchases, you have the same protection as you would with presenting the physical card or entering the card information on a merchant’s website. If you returned merchandise paid with a credit card via Apple Wallet, the refund goes back to the credit card. If you encounter problems with any transaction or need to report unauthorized charges, you contact the issuing banks of the credit or debit cards, including Green Dot Bank.

Some financial institutions partner with P2P payment apps to take advantage of their user friendly features. For instance, American Express partners with Venmo/PayPal. You can link your American Express app to your Venmo account. “American Send” is a virtual prepaid debit card issued by American Express National Bank that you can use to send cash to individuals. You put money into “American Send” from your American Express credit card. By linking to your Venmo account, you can use the American Express app to send money to individuals who have the Venmo app. The receiving person does not need to have an American Express account. If you encounter any issue, you only need to contact American Express. Since you already provided personal identity information when you apply for the American Express credit card, no additional registration is necessary.

Other P2P payment apps partner with multiple financial institutions, including ones owned by the same conglomerate parents. For instance, Venmo is owned by a conglomerate that also owns PayPal. When you set up a Venmo account, you can link it to a bank account, a debit card, or a credit card. Venmo is not a digital wallet. Venmo automatically withdraws money from the linked bank account or card when you make a transaction. Then Venmo sends the money to the recipients you specify. Venmo currently charges a 3 percent fee for using credit cards. When you send funds to individual Venmo accounts (i.e. not business Venmo accounts) most credit card issuers consider the transaction a cash advance. You should check with your credit card company on how they handle Venmo transactions to avoid surprise fees and interest charges. If you receive money, the fund is stored as a Venmo balance. In general, Venmo balances are not FDIC insured and not protected against unauthorized charges. Only a limited types of Venmo accounts have their Venmo balance stored in regulated banks and eligible for FDIC insurance. The simplicity of the Venmo app makes using it very convenient when everything works. When there are issues, things can become complicated. Venmo is unregulated and is not required to investigate complaints.

Buy-Now-Pay-Later (BNPL) and Rent-to-Own

Buy-Now-Pay-Later (BNPL) is a relatively new payment option and is gaining popularity. BNPL is an installment loan, a type of unsecured closed-end credit. Figure 7.12 shows a sample BNPL offer. In Chapter 6, we discussed the good reasons and bad reasons for using credit. Studies have found that consumers tend to spend more when they use BNPL as a payment option. Excessive spending is a bad reason for using credit. The zero percent interest offer may sound like a good deal. The truth is that about 70 percent of consumers who use BNPL end up paying interest. Unintentionally accumulating debt is another bad reason for using credit. Before buying an item with BNPL, ask yourself: “Will you make this purchase if you have to pay cash for it?” Taking out a loan is an important decision and you should consider its impact on your budget carefully before committing. An impulse purchase is a bad reason to take out a loan.

Rent-to-own is another form of consumer finance. It is popular with furniture, appliances, and electronics. Rent-to-own is actually a lease agreement with a purchase option at the end of the lease. Many of these programs offer weekly or monthly payment plans. Since this is a lease, you do not own the item. If you fall behind on payments, the rent-to-own company can repossess the item regardless of how much you have already paid. Rent-to-own agreements often do not require a credit check, making them a form of financing available to consumers with low credit scores. The downside is that they come with very high interest rates and fees. A Consumer Reports’ investigation found that some rent-to-own companies charge interest rates as high as 300 percent on appliances and electronics. In one instance, the investigation found that the lease payments on a $600 computer would total nearly $1900.

Safe Banking Practices

The first principle of safe banking is to diversify where you store your money. Avoid keeping large amounts in your primary checking account and any account linked to payment apps and debit cards. These accounts are generally intended for everyday transactions, and concentrating your wealth in them increases your exposure to potential risks associated with fraud and thefts. Instead, take advantage of the security and higher interest rates offered by savings accounts and money market accounts. You can set strict withdrawal and transfer limits on these other accounts. Set up direct deposits into these more secured accounts and transfer only the amount necessary to cover your anticipated expenses plus a safety margin into your checking account. Streamline the transfer process by setting up recurring scheduled transfers. Alternatively you can split up direct deposits into various bank accounts based on expected needs. Having a budget will make this process a lot easier. If you use automatic payment, set up reminders on your calendar 3 to 5 days before the payment date to ensure that you have sufficient funds for each payment. Keeping your money separate reduces the potential impact of unauthorized access to your debit card, checking account, or payment apps.

Set aside a banking hour once a month to take care of your financial needs. Use electronic statement delivery to avoid mail theft. Keep a copy of the last 3 months in secured storage so you have your records. Protecting your financial well-being requires diligent monitoring and proactive security measures. Set up alerts for transactions and regularly review your bank account balance and transaction history. Even seemingly small, unrecognized transactions can be indicators of potential larger fraudulent schemes. Mobile banking apps offer convenient tools for real-time monitoring, allowing you to stay informed about your financial status at your fingertips, no matter where you are. Familiarize yourself with the features of your banking app and configure notifications for various activities, such as credit and debit card payments, online transfers, and login attempts.

In today’s digital landscape, robust password security and multi-factor authentication are indispensable. Employ unique passwords for each of your online banking and financial accounts. Make sure the contact information associated with your MFA is up-to-date. Remain vigilant against phishing attempts and scams. Legitimate financial institutions will never ask for sensitive details such as passwords, PINs, or account numbers through email, text, or phone. Stay informed about common scam tactics.

What to Do if You Are in a Financial Jam

We hope this will never happen. Unfortunately, life sometimes throws us curve balls that we cannot dodge. You may find yourself short on funds due to unexpected life events despite careful budgeting and managing your money. It is useful to know your options so you can be prepared. The first obvious step is to reduce spending, followed by using emergency funds. When these efforts are not enough, you may need to consider borrowing money to remedy the situation temporarily while working on longer term solutions. Remember to take into account how to repay these short-term loans, which will be due in the next few weeks or months.

Negotiate

Before looking at loan options, communicate with the party you owe money to. If your financial hardship is due to medical bills, hospitals often have programs available to help patients with financial needs. These programs range from discounts to payment terms over time. If you withheld too little and are faced with a large tax bill, contact the IRS to arrange for payment terms. It is difficult to admit to financial hardship. It may help to know that many people experience similar situations. Facing the problems head on is much, much better than ignoring them.

Credit Card Cash Advance

If you already have a credit card you can get cash from it using the cash advance option. Most credit cards have cash advance fees and charge a higher interest rate on cash advances than regular purchases. Cash advances do not have any grace period and interest charges start to accumulate immediately. Moreover, if you use more than 30 percent of your credit limit, your credit score will decrease, affecting your ability to get other loans. The advantages of this option include speed and that you do not need to submit any applications. There is no fixed repayment date though interest continues to accumulate until you pay off the entire balance.

Personal Loans

Personal loans are unsecured installment credit and usually have terms ranging from one to seven years. Your ability to obtain a personal loan and the interest rate on the loan depend on your credit worthiness. Some personal loans require proof of income. Banks, especially credit unions, are traditional issuers of personal loans. Personal loans may have fixed or variable interest rates. Watch out for lenders that advertise no credit check and no income verification loans. These loans typically have very high interest rates. For more traditional personal loans, the interest rates are usually lower than credit cards. Personal loans are sometimes used to consolidate outstanding credit card balances. If you take out a personal loan, be sure to adjust your budget to account for the new loan payment.

Non Credit Card Cash Advance and Payday Loans

Most non credit card cash advance providers are online or mobile apps. They offer small loan amounts up to a few hundred dollars at very high interest rates and fees. Many of these providers use the term ‘tips’ to avoid labeling the charges as fees or interests. They exclude tips when computing the APR they disclose, hiding the true cost of the loans. They manipulate users into paying these tips through tricky user interfaces or implying repercussions for not tipping. APRs on these cash advance apps can be 100 percent or much, much higher. The repayment terms are short, within a week or a month. Automatic repayment is often required, which usually means you sign an ACH authorization for the lender to withdraw funds from your checking account on the due date. Some of these apps advertise instant approval and funding to appeal to consumers.

Payday loans are usually for $500 or less and are due on your next payday. Payday loans are regulated by state laws, which vary greatly. Some states have set maximum fee amounts,  ranging from $10 to $30 per $100 borrowed. The costs of payday loans are very high. For instance, borrowing $400 with an $80 fee for two weeks translates to an APR of 520 percent. Furthermore, some states allow lenders to “roll over” or renew loans, trapping borrowers in a cycle of continuous fees without paying down the loan itself. Payday lenders typically do not verify your ability to repay the loan and do not require a credit check. They do require automatic repayment from your bank account or direct payroll deduction.

Payday loans and non credit card cash advances are very similar. Their greatest disadvantages are the high cost and the short due date. One pay period or a month is seldom sufficient time to find a sustainable solution to a significant financial hardship. Consumers of these types of loans are often trapped in an endless cycle. After these lenders deduct the repayment from their bank or paycheck, they may find themselves short on funds again and need another loan.

Car Title Loan

Car title loan is a form of secured credit with terms ranging from a few weeks to a few months. A borrower who owns their car free and clear can use the car as a collateral. If the borrower fails to repay the loan, the lender takes the car. Car title loans are usually between a few hundred and a few thousand dollars. The maximum loan amount is generally between 25 percent to 50 percent of the market value of the car pledged as collateral. Car title loans typically have very high interest rates and many additional fees. Some lenders require installing a GPS tracker on a car and a device that can remotely disable the car’s ignition. The borrower pays for the costs of these devices and their installation. It is difficult for many borrowers to repay a car title loan within the short time period of the loan, forcing them to reapply for another loan and pay additional fees. Car title loans are considered predatory and are outlawed in some states.

What is Unbanked and Underbanked?

As you have seen in this chapter, bank accounts and credit cards are essentials for managing your daily finances. Unfortunately, not everyone in America has full access to banking services. An unbanked household is one where no member has a checking or savings account at a bank or credit union. In 2023, 5.6 million U.S. households were unbanked ^[1]. An underbanked household is one that has a bank account but lacks adequate access to other traditional financial services, such as credit cards and loans. In 2023, 19 million U.S. households were underbanked. This means that almost one in five households in the U.S. is either unbanked or underbanked.

The primary reasons cited for being unbanked include not having enough money to meet minimum balance requirements and a lack of trust in banks. Unsurprisingly, households with lower incomes are significantly more likely to be in this group. There are also racial disparities, with Black and Hispanic Americans overrepresented. Figure 7.14 shows the unbanked rates by race and ethnicity from 2009 through 2023.

Being unbanked or underbanked are inconvenient and costly. Common services used by these households include prepaid debit cards, payday loans, check cashing services, and buy-here-pay-here car finance. You have seen in earlier sections of this chapter the high interest rates and fees associated with some of these services. In 2018, unbanked and underbanked Americans spent an estimated $189 billion in fees and interest on non-bank financial products. It is expensive to be poor.

Here are some steps you can take to become a banked household. If your reason for not having a bank account is due to lack of trust, information in this book can help you overcome misconceptions about banking complexity. If lack of regular income or money is the cause, look for banks that do not require minimum balances. Some banks have special programs designed to assist unbanked households. You can also seek help from credit counseling services. You can save money and gain convenience by taking the time to set up a bank account.

Appendix 7.1

Link to sample disclosure report by ChexSystems. 

Appendix 7.2

Link to detail information on BBank checking accounts.