How to write a check (and other check-related stuff)

When you open a checking account, you’ll usually be given or sent a box with a bunch of checks in it. Even though they are much less popular than cards or cash for everyday spending, checks are still a viable way to pay for stuff, and sometimes they are the best or only way.

They also come in handy when you need to pay someone but don’t have the money right away. You can write the check and tell whomever you’re paying to wait until a certain date (when you know you’ll have the money) to cash it. 

If you’ve never had to use or write a check, however, they can be a little scary. The first time I wrote a check I messed it up majorly. So get psyched, because today we’re going to go over everything you need to know about checks!

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This is a check:

sample-check

Some will look a little different, but the basic layout of a check is always the same.

In the top left will be the information of the person or company who is writing the check. On your checks, your name and address will be here.

In the top right corner will be a number, which represents the number of the check. The first one in your pack should be something like 001.

On the bottom of the check should be a bunch of numbers in three groups. The group on the left is the routing number for your bank account. The middle group is the account number itself, and the last group is the check number again. When you pay for things online using your account or set up direct deposit payments, you’ll be asked to provide the routing and account numbers.

Then there are a lot of blank lines for you to fill out. Let’s look at how to do that.

How to write a check:

  1. Use a pen, never a pencil. You don’t want anyone being able to change the info on the check after you’ve written it. Also, as much as I love colored or sparkly pens, stick to blue or black ink for checks. 
  2. Write the date.
  3. On the line next to PAY TO THE ORDER OF, write to whom the check is addressed. For example, pretend Pinocchio is paying Jiminy Cricket for being his conscience. He’s going to write “Jiminy Cricket”. If you’re writing the check to a person, make sure you write the name that appears on that person’s bank account. In other words, don’t make it out to Bobby if his legal name is Robert.
  4. Next, on the big line under the PAY TO THE ORDER OF line, write the dollar amount you are paying in words and the cents as a number over 100. For example, Jiminy Cricket might charge $106 for his services, so Pinocchio writes “One hundred six dollars and 00/100”.
  5. In the box or on the line that has a $ in front of it, write the amount you are paying in numbers. Don’t forget the decimal! This is $106.00 in Pinocchio’s case.
  6. At the bottom of the check are two lines. The left one should say FOR. This is where you can write a note about what the money is being given for. You can write stuff like “Birthday gift” or “Gas money” here to help you keep track of where your money’s going or to remind the person you’re giving it to what it’s for, but this line is technically optional.
  7. Lastly, sign the line on the bottom right of the check. Hooray! You’re done.

Pinocchio’s finished check would look like this:

sample-check-filled-out

How to deposit a check:

  1. Double check that all of the information on the check is correct, including who is giving it to you and how much it’s made out to. Fixing errors after the money has been deposited may be difficult or impossible.
  2. Sign the back of the check on the line that says ENDORSE HERE. By endorsing the check, you are saying you have received it and the information on it is correct. Some banks have added a box on the back of their checks that needs to be marked if you plan to deposit your check through a mobile app.
  3. Take your check to the bank, or use your bank’s app to deposit the check.
  4. NOTE: If you use an app to photograph and deposit a check, make sure you hang on to the check until it clears and the money appears in your account. If something goes wrong, you don’t want to have to go back to the check writer and ask for another check. After the money is in your account, destroy the check by shredding it before trashing it.

I’m sure Jiminy Cricket needs his money for…top-hat maintenance? Whatever. He’d endorse his check like this:

sample-check-back

What to do if you make a mistake:

If you’re anything like me, you’re going to make at least one mistake on a check. Since checks are always written in pen, correcting errors has to be done carefully. Never use white-out on a check.

If you make a mistake, correct it neatly and with as little scribbling as possible; then write your initials next to the correction. This proves that you made the change, not the person you’re paying.

What to watch out for with checks:

  1. This may seem obvious, but make sure there’s enough money in your account to pay the full amount of the check. Checks act like debit cards in that they take the money from your account as soon as they are cashed. If you don’t have enough money to back it up, a check will “bounce”. A friend might just be annoyed by this, but businesses often charge fees of around $25 if a check you give them bounces.
  2. NEVER give anyone your blank checkbook, and especially don’t pre-sign a check for them. Once a check is authorized with your signature, someone could write any number they wanted in the money box and clean out your account.
  3. It’s also not a great idea to walk around with checks in your wallet or purse. If you lose your checkbook, it’s basically like losing a debit card. You’ll have to call your bank to freeze your account so no one can access your money, including you. Then you’ll have to go through the process of closing your account and opening a new one with a new number since checks have both the account and routing numbers on them. It’s a whole messy thing, so leave the checkbook safely tucked away at home unless there’s a very specific reason for taking it with you.

Whether or not you use checks regularly, knowing how to write them is an important skill. Now, when you go to pay your first month’s rent, split bills with your roomies, or pay your parents back for a loan they gave you, you can fill out your check with confidence and sign it with a flourish.

What is overdrafting?

My senior year of college, five other girls and I drove down to Daytona Beach, Florida for our spring break. We were there too early in the season for all the crazy, party-hard events Daytona is known for, but we had a good time exploring the area and lying on the beach.

On our last day there, several of us stopped by a stall where a lady let you pick an oyster and then made some jewelry for you from the pearl inside. For $12, I got myself a cute gold necklace featuring my perfect, white pearl.

On the way home, my phone rang. It was my dad, telling me he’d gotten a message from the bank that my checking account was overdrawn.

“Don’t use your debit card for anything else!” he said.

I stared at the soda and snacks I had just bought at a gas station. Oops.

When I got home, my dad marched my brother and me over to the bank to talk to someone about overdrafting and how we had to be careful about our money. I was so embarrassed, I wanted to melt into the floor. It was a rough introduction to the overdraft monster.

How does overdrafting happen?

The overdraft monster appears when you spend more money than you have in your bank account.

Say you use your checking account to pay for something that costs $50. Unfortunately, you only have $45 in your account. Now, one of a couple of things might happen.

  1. Your bank declines the transaction and does not charge you a fee. Lucky you. Of course, you won’t be able to buy the item you’re trying to purchase. This scenario usually happens if you try to use your card for purchases, but sometimes the bank will reject (or bounce) a check or electronic withdrawal.
  2. Your transaction will still go through, but now your account will have a negative balance of $5. You have now overdrafted your account and the bank will charge you an overdraft fee as a penalty. This is what happened to me. Overdrafts usually happen with checks or automated payments that come out of your account, although each bank varies in its policy on what is allowed to trigger an overdraft.

Overdraft fees:

If you overdraft, the bank will charge you an overdraft fee, which is usually around $35. And not just once.

No, no.

Every time you overdraft, you owe another $35, which can really add up if you’re not careful.

The necklace and snacks I had bought had only cost maybe $20 total, but they had racked up $70 on top of that in overdrafts and fees!

Avoiding overdrafting:

Obviously, we NEVER want to pay overdraft fees, but how can we best protect ourselves against them?

Firstly, of course, we should always pay attention to how much money is in our checking accounts, especially if we pay automated bills or subscriptions from them. By being aware of how much money you have going into and coming out of your account, you can save yourself a lot of worry and will never come close to overdrafting.

If you don’t trust yourself to keep track of your money that closely, there’s a backup option available. Most checking accounts come with free “overdraft protection”.

Basically, overdraft protection means you connect your checking account to another, separate, bank account or credit card and give the bank permission to charge any overdrawn amounts to those accounts. I would recommend using a savings account as your overdraft protection. Credit cards are much riskier back-ups, since you’re just borrowing that money and will have to pay it back, perhaps with interest.

Some banks have restrictions on what kinds of accounts can be used for overdraft protection, so check with your bank before you sign up.

If you overdraft

There’s not much you can do if you overdraft, but it’s worth a shot to call your bank and ask about your options. After my dad dragged me to the bank, the woman we talked to was willing to excuse one of the two overdrafts I’d racked up. Someone might at least be able to help you sort out a payment plan.

In the end, however, it’s best to stay aware of your money situation and keep that overdraft monster from invading your life and bank account.

How to build credit as a teen

Credit is an amazing word. It gets used for all sorts of things, like crediting a source in a research paper or giving your brother credit for not stealing all your Cheetos even though they were RIGHT THERE waiting to be stolen.

In the money world, credit is a big deal. Without credit cards, online shopping would be much harder, and without lines of credit like mortgages and car loans, a whole lot of people wouldn’t be able to afford houses or cars.

The word credit actually comes from a Latin word meaning belief or trust, which makes sense because when someone loans you money, he or she is trusting that you will pay it back. Credit scores were invented to represent how likely it is that you’ll do that.

Trouble is, credit scores are based on a lot of factors, all of which reflect your history using credit. Without a credit score, you won’t get money from most lenders. So, how do you get credit if you don’t already have it?

How do I get credit?

Creating a credit profile can seem like a Catch-22 because many credit-building sources require a credit score!

I remember thinking that this was confusing and unfair when I was first looking to build credit, too. Luckily, there are a couple of side doors into the world of credit that can help get you started at any age.

If you’re a minor…

If you’re under 18 in the US, you cannot qualify to borrow money or open a credit card of your own. However, there are still ways to start building a healthy credit record with the help of your parents or legal guardians.

Become a registered user on an adult’s card.

Registered users get access to the perks of the credit card, but are not responsible for paying for charges made on the card. Living the dream.

Of course, this option requires a lot of trust on the part of the person allowing you onto his or her account, so if you want to remain on good terms with this person, don’t go hog-wild with the credit card.

My dad did this for me when I was first starting out, and it was understood that the card was for emergency use only. Otherwise, I used my debit card. I’m so thankful now that I got the benefit of his years of credit background and good money management. It made getting my first apartment much easier. Thanks, Dad! 🙂

If you’re 18 and over…

Becoming a registered user is also an option for non-minors, but once you’re legally an adult, a lot of other options open up, too.

Have an adult co-sign on your first loan or credit card.

Co-signers are basically there to reassure the credit-givers that SOMEONE will pay them back, even if you flake out. This means they are on the hook for any money you borrow or charge if you don’t pay it back, so, again, don’t abuse this privilege if you want to keep your relationship with your co-signer healthy.

Get a secured credit card.

This one you can do all on your own! Secured credit cards are designed to help people build enough credit to get a real, big-person card.

To get a secured card, you’ll usually have to pay a deposit equal to what the card’s credit limit is. It then works just like a real card, including interest rates on unpaid balances. When you are ready to graduate to an unsecured card, pay off any balance on the unsecured card and you’ll get your deposit back.

If you’re interested, WalletHub has a nice list of 10+ Best Secured Credit Cards for 2017.

Report your rent payments.

If you’re living off-campus at college or just living on your own, using a service that reports your rent payments to the credit bureaus can help you build credit without needing a credit card or loan. You’re going to be paying rent anyway, so why not benefit from it?

These services typically charge you a fee for each payment they report or each month you use them, and some charge a set-up fee. However, in the long run, a higher credit score could save you much more money in the future, so a rent payment reporting service might be worth it if you can afford it.

You might need to get your landlord or apartment office on board, and not all rent-reporting services report to all three credit bureaus, so make sure you read all the fine print before shelling out any money.

Popular services include RentReporters, Rent Kharma, Rent Track, PayYourRent, and ClearNow. I have not personally used any of these services, so I can’t endorse any one of them over any other.

Take out a credit-builder loan.

Some banks and credit unions will loan small amounts of money to people with bad or no credit with the goal of building those people’s credit score.

There’s a catch, though.

When you get one of these loans, you don’t actually get the money. The bank puts it into an account, where it waits for you to complete the payments on it. THEN you get the money.

This is clearly not a loan for people who actually need the money for something right away. It really is only for building a payment history. However, the amounts are small, sometimes only $100, and the potential bumps to your credit are large, so if you are 100% sure you can pay all the installments, this could be a nice way to add some points to your score.

Be careful

Don’t over-extend yourself trying to do all of these things in a hurry. Pick one or two ways you want to start building credit, and put those into action. If, after a few months, you’re still on track and want to explore other options, feel free.

Remember that no matter what methods of credit creation you use, the best thing you can do to boost your score is to make payments on time. Do that consistently, and your score will rise naturally.

What is a Credit Utilization Ratio?

In my article about what a credit score is, I talked about the factors that affect a credit score. Most of them are pretty straight forward. However, the second-most-important factor, your Credit Utilization Ratio (CUR), is a little trickier because it’s all about percents.

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I can feel all you math-phobes out there starting to sweat, but just hear me out.

Your Credit Utilization Ratio is the relationship between what you can borrow and what you actually borrow. This is represented by the percent of your available credit you’re using at any one moment.

Example

For example, say you have a credit card with a credit limit of $1,000. That means your available credit is $1,000.

Lucky you, you have a date! You go out and end up paying for dinner for both you and your date, and charge $50 to your card.

To find out what percent of your available credit this is, follow this formula:

(part÷whole) × 100 = %

In this case $50 is our part, $1,000 is our whole. Divide them, and we get 0.05. Multiplying by 100 gives us 5, which is our percent. So, you have used 5% of your available credit.

By the way, you’ll need that formula on the SAT, so you might as well memorize it. 

To keep your credit score looking rosy, you want to use 30% or less of your available credit. What is that for our imaginary credit card? Back to the formula!

This time, we’ll plug in numbers for the percent and whole, but we need to find the part.

(part÷1000) × 100 = 30

Using those awesome algebra skills I know you have, you can divide each side of our equation by 100, then multiply each side by 1000 to find that $300 is the most you should spend on your credit card before you pay it off.

Important Notes

  • Just because you can spend up to $300 in our scenario doesn’t mean you should. That’s just the max. Keeping your spending less than that creates an even better Credit Utilization Ratio.
  • Most credit cards and banks report what you owe to the credit bureaus once or twice a month, so if you do have to charge more than $300, it may not affect your score if you pay at least some of it off before it gets reported to the bureaus.
  • Every new line of credit you open increases the amount of available credit you have. Closing those accounts decreases that available credit. Both of these events affect how much you can spend and still stay within the ideal CUR range.
  • If you get offered a larger credit limit, don’t let it convince you to spend a ton more money simply because you’ll be able to. Remember, you still have to pay off the whole amount before the end of the month.

Now you know what a Credit Utilization Ratio is, use that knowledge to give yourself incentive to curb your spending urges. Your credit score and future self will thank you.

What is a credit score?

You might have seen the commercials for sites and credit cards that give people access to their credit scores. All the people in those ads seem so surprised and excited to get their credit score, and it always shows a screen with some number in the 700s on it. But, you might be thinking, what exactly is a credit score?

What are credit scores?

Essentially, credit scores are meant to represent how likely you are to pay what you owe.

Credit scores are based on a formula created by a company called the Fair Isaac Corporation (FICO), so you’ll often hear credit scores called “FICO scores“. There are other types of scores out there, but for our purposes, we’re going to focus on the classic FICO score, as that’s what people are usually talking about when they say “credit score”.

There are three credit bureaus — Experian, Equifax, and TransUnion — that collect credit reports on people and provide credit scores based on what’s on these reports. Scores will often vary a little between these companies depending on what information they have collected in their reports.When a credit card or bank offers you free access to your credit score, it will use data from one or more of these credit bureaus to come up with the score.

Who cares?

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Zendaya may not, but some people do

Money lenders: Banks and other lenders use credit scores to determine if you are someone they want to loan money to for stuff like a car or mortgage. Usually, people with high credit scores will be approved for bigger loans and be charged lower interest rates than those with lower credit scores.

Landlords: Credit scores help landlords decide if you’ll be a good bet as a tenant. A high credit score shows landlords you are responsible and will probably pay your rent on time, so if you’re competing with other applicants for a nice apartment, a good credit score can help put the odds in your favor.

Credit card companies: People with good credit will be approved for a wider range of cards and higher credit limits than those with poor credit.

Employers: Sometimes, employers look at credit scores to get a picture of who they might be hiring, although this practice has been widely criticized.

What do the numbers mean?

Credit scores range from 300 to 850. The higher your score, the better you look to lenders and landlords.  Scores generally break down like so:

Anything 750+ is Excellent

Between 700 and 749 is Good

Between 650 and 699 is Fair

Between 600 and 649 is Poor

Anything below 600 is Bad

How do people get good credit scores?

Credit scores depend on several criteria, some of which are more important than others.

fico-score-percentages

Source: FICO.com

Payment History: Your payment history is the most important factor that controls your credit score, and the concept is so simple. It reflects whether you pay your bills on time or not. Late payments or debt that “goes into collections” (basically someone has to chase you down for it) cause terrible damage to your score. Pay your bills, people.

Amount of Debt: This category is also known as “Credit Utilization Ratio”. Essentially, the more you owe compared to what credit you have available, the worse your score. More on that in another post.

Length of Credit History: For teens and young adults, this section is tough. The longer you’ve been building credit, the better, but most of you haven’t had a chance to do much credit-building. That makes the other parts of the score even more important when you’re starting out.

New Credit: Every time you apply for a new loan or credit card, the company you are applying to does a “hard pull” of your credit report to check you out, and your score gets dinged a little. “Soft pulls”, like when you request your own report, don’t affect your score.

Credit Mix: Credit bureaus like to see that you’ve had experience with a mix of credit situations, such as credit cards, mortgages, loans, etc. The more types of credit you’ve successfully managed, the better your score looks.

Wrap-up

So there you have it. The credit score system may not be perfect, but it’s not going away any time soon.

Your personal credit score plays an important part in your financial future, so it’s a good idea to at least be aware of it in your teen years and going into college. Debt and late payments when you’re wild and reckless can set you up to spend years re-building your credit. You’ll have plenty to worry about when you get out of college. Whether you’ll end up in a crappy apartment because your credit score is in the toilet shouldn’t be one of them.

Why buying a $10,000 watch for your girlfriend is a bad idea

Yep, you read that title correctly. The idea of dropping that much cash on anything, especially a gift, is crazy for most adults, never mind teens, but I had a student a couple of years ago who did just that.

Here’s the scenario: Bob [obviously not his real name] had a girlfriend. Bob also had a savings account his parents had set up for him that contained roughly $10,000. Bob and his GF were going through a rough patch because, well, high school. Bob thinks “I know! A gift will help me show her I love her and will make her happy!” Then, during what I can only think must have been a moment of insanity, Bob spent almost every penny of that savings on a fancy watch for his lady.

I nearly fainted when he told me. I can only imagine what happened when his parents found out what had happened to that savings account. Also, his GF and her parents were uncomfortable with how expensive the gift was and it just made Bob’s relationship problems worse.

Okay, so, this was a crazy move, but there’s more to take away from this event than that. Let’s look at this a little more closely.

 

What were Bob’s mistakes?

1. Assuming his relationship problems could be solved with money

Healthy relationships should never center around money. Relationships, by definition, are based on relations between people and how they interact. Of course, money can, and does, affect relationships all the time, but it should never be the number one thing holding people together or pushing them apart. If it is, then the relationship isn’t a healthy one.

Before you throw money at a problem with your significant other — or your friends, or your parents — think about whether there’s anything else you could do to patch things up. Sometimes a good talk, a sincere apology, or a sweet note will do more good than material things ever could. This is especially important when you’re young and have very little money to be throwing around in the first place.

2. Sacrificing one relationship for another

Bob’s parents had been more than generous in setting up that savings account, and I would bet they did it with the idea that this would help him in the future. Maybe he would run into a rough patch in college or afterward and this money would be his emergency fund. Or maybe he could have used it to buy a home. You know what they didn’t expect him to use it for? Gifts for his GF.

Chances are good Bob was thinking “Hey, it’s my money now, I can use it for whatever I want.” While that may have been true, I guarantee that such a waste of their gift destroyed his parents’ trust in his ability to make good decisions and appreciate their generosity. Bob will probably spend years working to rebuild that trust.

3. Not considering the future

This is the biggie. While Bob certainly has some short-term work to do on his relationship skills, the long-term effects of his mistake are going to echo for years. Saving up an extra $10,000 isn’t easy in your teens and twenties. By being given a head start, Bob might have been able to start a retirement account or other investment fund that could have been making him money while he was still young. Having a head start with saving and investing, even by a few years, can have massive rewards later in life.

What can $10,000 do?

If you find yourself tempted to spend, do something Bob obviously did not: ask yourself what else you could use that money for. If any of it sounds better than what you’re about to buy, don’t spend the money.

So now let’s consider what $10,000 could have gotten Bob, other than a watch and a heap o’ trouble.

1. Security

This is the simplest answer to what the money could have provided for Bob. He was approaching college, a time when people are usually broke, and that money could have given him a cushion to help pay for college or even helped him move to his dream location after school to snag a job without taking on debt.

2. Experiences

Ten thousand dollars could have funded a pretty sweet trip around the world for Bob. Along the same lines, he could have used his stash of cash towards a study abroad program during college. Perhaps he could have taken a class in something he’d like to learn but couldn’t in school, like pottery or cooking. Any of these experiences would have given Bob a new perspective on the world, which is priceless.

3. More money

By investing the money, Bob could have actually used it to make more money for himself with basically no effort on his part. Even if he’d left it in the savings account, he could have made money, albeit a tiny amount.

4. A business

In today’s digital world, it’s pretty easy to start an online business, and plenty of teens have taken advantage of this. One of my students made a bunch of money for college through buying and selling high-end sneakers online. Ten thousand dollars would have bought Bob plenty of starter inventory if he’d wanted to start something like that.

Okay, I think you get the point. Bob made a huge mistake. Luckily, being young gives him the advantage of having plenty of time to recover from that mistake, but next time you feel your emotions pushing you to spend money, ask yourself if you’ll regret it in the future. I guarantee you Bob does.

What is a debit card?

When you open a checking account, and sometimes a savings account, with any major bank, you receive a debit, or check, card. It looks like a credit card, but it usually has the word “Debit” printed on it somewhere. So what is this card and how should you use it?

A debit card allows you to access the funds in your checking account. It is the card you use to get cash out of an Automated Teller Machine (ATM) and can usually be used anywhere that accepts credit cards.

Let’s look at some of the features of debit cards:

 

Spending:

When you pay with a debit card, the money is drawn from your account immediately. This means that if you spend more than you have in your account, you will overdraft your account, and will usually owe the bank a fee on top of the amount you overdrew.

For example, if you only have $25 in your account, but pay for a $30 dinner, you will overdraft your account by $5. If your bank charges a $35 overdraft fee, you now owe the bank $40 for that five dollar mistake!

Also, if you make ANOTHER purchase with that card, you’ll be charged ANOTHER $35, and so on. Obviously, it’s super important that you keep track of what you have in your account, which is great practice for using a credit card.

 

Limits:

The amount of money you can spend on a debit card is limited by the amount of money you have in your bank account. Spend any more than that and you’ll start racking up overdraft charges.

 

PIN:

Many debit cards require you to enter a Personal Identification Number (PIN) when you withdraw cash from your account and when you make purchases. Others allow you to make purchases using the “Credit” selection on the checkout machine, but still require a PIN at the ATM. When you get your card, it will come with instructions that tell you how yours works.

 

Security:

Because of the direct connection to your checking account, debit cards can be very dangerous if they are lost or stolen. If someone steals or finds your debit card, he or she may be able to make purchases with it, and if the thief has your PIN, he or she can withdraw money from your account. Anything this person uses will immediately be taken from your account. Disputing these charges takes a lot of time and effort, and you may never see that money again.

 

Credit History:

Debit cards do not affect your credit history.

 

Fees:

Banks generally do not charge fees for debit cards, but you might have to deposit a certain amount, usually something like $25 to $100, in the bank to open the card in the first place. 

 

Perks:

Debit cards usually do not carry perks, but a few banks are starting to add cash back, sign-up bonuses, and miles to their checking programs.

 

When should you use a debit card?

I would say that any time you’re buying something in person and the card doesn’t leave your hand, it’s fine to use a debit card. I would avoid using a debit card online or at places like restaurants, where your information is more likely to be stolen. It may never happen, but there’s still the chance your hard-earned cash might disappear.

If you think your information has been stolen, or see charges on your card that you didn’t make, call your bank immediately and tell them to put a hold on the account to prevent that card from being used again until you sort out what’s happening.
Debit cards can be super useful for building responsible money habits without running the risks of using credit cards.

Want to compare debit cards to credit cards? Head on over to What is a credit card?

What is a credit card?

Credit cards are both amazing and terrifying.

They allow us to pay for whatever we need instantly and without carrying cash around, and they take up only a tiny space in our wallets. A good credit card can be a powerful tool, but it can also be dangerous. Let’s take a look at what credit cards are and how they work.

Spending:

When you use a credit card to buy something, like those shoes you really, really want, you’re actually borrowing that money from the bank or credit card company. The company pays the store or vendor and you walk away with some shiny new kicks…and in debt.

Because you just borrowed money from the bank or credit card company, you now owe it that money. If you’re smart, you’ll pay back all of that money at the end of the month because then you don’t need to pay anything more than the price of the shoes.

However, if you don’t pay all the money back, you’ll be charged interest on it. This is something you want to avoid like the plague. Credit card interest is some of the highest interest out there. It’s not unusual to see 15% or more. Actually calculating this interest is complicated, but NerdWallet has a great article breaking down how credit card interest is calculated.

Limits:

Most credit cards have limits of how much you can borrow on them at one time. For teens and young adults, this number is usually in the low thousands. This number usually increases as time goes by and you handle the card responsibly. Of course, just because you have the ability to charge thousands of dollars doesn’t mean you should!

Ideally, you will never charge more than you can pay off at the end of the month. Otherwise, anything you don’t pay off will roll over to the next month and become credit card debt. (Boo, hiss!)

PIN:

In the United States, credit cards don’t require PINs. In many other countries, however, PINs, along with chips embedded in the card, are required to make purchases with credit cards. The chips are being adopted in the US, but are still paired with a signature rather than a PIN.

Security:

If your credit card is lost or stolen, you can contact your bank to stop further charges on it. Most credit card companies are very good about refunding fraudulent charges on your card and quickly sending you a new card. The biggest hassle involved with a stolen or lost card is having to change all online accounts that use that card. For the added security, however, all your online shopping/accounts should be attached to credit cards, rather than debit cards.

Credit History:

Credit card payments form the bulk of most people’s credit history when they are young. Before you have responsibilities like car payments and mortgages, credit cards and student loans are the best ways to prove how trustworthy you are with money and start building a credit score.

Responsible managing of a credit card or two over the long term is a great way to start building a good credit history. However, you have to be 18 to have a credit card in your name. If you’re too young to have your own card, there are other steps you can take to make a start building credit, which we’ll discuss in another post.

Fees:

Some credit cards charge a yearly fee to keep them. These ones often have great perks, but not always. Your first card should probably be a simple, no-fee card.

Perks:

The perks you can get from credit cards vary dramatically from card to card, but the most common ones are cash back and airline miles or points. Cash back simply gives you back a certain percent of your purchases on the card. Airline miles or points build up when you buy stuff on the card, and then you can use them to book airline travel for cheap or even for free.

When should you use a credit card?

Almost anything can be purchased using a credit card, which is why they can be so dangerous. It’s so easy to swipe that plastic and forget that the money isn’t free. However, with responsible use, credit cards are so much better than debit in many ways.

The perks, the security, and the credit-building power of credit cards makes them preferable to debit cards, but ONLY if you can trust yourself to not go on spending sprees. Of course, do your homework on any card you think you might want to decide which ones fit your needs and habits.

What is a checking account?

Checking accounts, along with savings accounts, are probably the most common types of bank accounts people have.

At first glance, checking accounts actually resemble savings accounts. They allow you to put money safely in a bank and access it whenever you want. The money in checking accounts is also insured up to $100,000, just like money in a savings account.

However, checking accounts come with a few perks that savings accounts do not.

Perks

First, they come with paper checks that you can write to pay people. Okay, so checks are certainly not used as much as they once were. When was the last time you saw someone pay with a check at the supermarket? But they are still an acceptable form of payment for most things you might want to buy. They are also useful for making big purchases when you don’t have or cannot use a credit card. Every landlord I’ve ever had has required a paper check payment for the first month’s rent and security deposit.

The second perk of a checking account is a check card, or debit card. This looks like a credit card, but will usually say “Debit” on it somewhere. This card is connected to your checking account, so whenever you use it to buy something, that money comes directly out of your checking account. This gives you the convenience of a credit card without the danger of spending way more than you have.

Two accounts?

So why would you have a savings account and a checking account? Well, one drawback of checking accounts is that they often do not pay interest the way savings accounts do. This has been changing over the last few years, but the interest rates are ridiculously tiny (as of this writing, Bank of America’s checking account interest rate is 0.01% — that’s one cent for every $100 in the account!), and you often must deposit a minimum amount to qualify to receive interest.  

The other drawback to checking accounts is how easy it is to get the money out of them. I can hear you thinking: Hold on. Isn’t that a good thing?

Yes, it is good…unless you’re trying to save money and you tend to be a spender. The fact that savings accounts make you put a bit more effort into getting your money out can help stop you from going on spending sprees, but that shiny debit card in your wallet is just begging to be whipped out every time you find an awesome outfit on sale.

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That being said, you’re going to need to build up some self control, and a debit card is often a great way to practice using a card responsibly before you get a credit card.

Your choice

In the end, the choice whether to have a savings account, a checking account, or both is up to you. A balanced approach might be to put most of your money in savings, and leave only what you’re willing to spend in the checking account. Having a little fun money never hurts, just don’t go crazy.

What is a savings account?

Ah, the good old savings account. This is often the only account most of us have or have even heard of before high school. A savings account is an account you can open with a bank. You put money into it, and it sits there, safely, waiting for you to need it. But what’s the big deal? Why is a savings account any better than stashing money in a piggy bank or under a mattress?

Two words: interest and insurance.

Interest

Unlike the money that sits in your piggy bank, money in a savings account earns interest. This means that the bank is loaning your money to people and paying you something as a thank you. Don’t worry, your money is still there and you can access it whenever you want. It’s just being used as part of the big pool of money the bank has to lend.

Sounds awesome, right?

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Free money!!

Well, this is a great arrangement for the banks, too, because they make the people to whom they loan money pay interest back to them, and that interest is a lot higher than what they pay you! Still, it’s fun to think of your money growing without you doing a thing except putting it in a bank.

You might have heard complaints about “low interest rates” in savings accounts over the last few years. It is true that the interest you earn on savings accounts is pretty tiny right now, but you’ll likely see interest rates rise and fall several times over your lifetime. Even a tiny interest rate is better than no interest, which is what you’d get from a piggy bank. Right now, the highest interest rates on savings accounts are around 1%. You definitely won’t get rich from your savings account, but, hey, it’s something.

Insurance

The second benefit of storing your money in a savings account is the insurance the bank offers on your money. Any money you put in a savings account (up to $100,000) is insured by the bank and stored in a fireproof safe. This means that if the bank goes out of business or burns down, you can still get your money back. If something happens to your piggy bank, though, that money is gone. Vanished. Kaput.

Something else money in a savings account is protected from? You!

If you are a spender, a savings account is your friend. Once money is in the savings account, the only ways to get it out are to physically go to the bank or ATM to get the cash or have it electronically transferred to another account, like a checking account. Most transfers take about three days to go through, which makes impulse spending difficult. It’s not foolproof, but by making spending your saved pennies difficult, savings accounts can help you break habits that keep you broke.

Know before you save

Ready to get a savings account of your own? Wait! There are a few things you need to know before you sign on the dotted line. Not all savings accounts are created equal. Learn about how to pick the right savings account for you and set yourself up for success in your saving journey.

If you want to know about other types of accounts, check out other articles in my “What Is…” series.