Banking

To make good decisions, it is important to be aware of the facts and realize that things are not always what they appear to be. In this section you will explore basic financial services, as well as different ways to determine whether or not financial offers are legitimate.

 

Banking Basics Banking involves paperwork. This is how records of where your money goes are kept. It is also how money changes hands. Have you ever written a cheque? Have you ever received a bank statement? Do you keep a record of your own transactions? Keeping a record of where your money goes is important. To help you keep track of the transactions that take place in your account, banks provide statements— either on paper or online, or both. Banks charge a fee for this service and this is one of the ways they make money. You need to keep your money in a safe place. Most of us start out with some type of piggy bank but eventually, we need to look for a place that is safer and easier to access. You must consider what type of financial institution you will trust with your hard earned cash.

Canadians can choose different kinds of financial institutions:

• Chartered Banks (e.g., Royal Bank of Canada, Canadian Imperial Bank of Canada, Bank of Nova Scotia, TD Canada Trust, Bank of Montreal, National Bank of Canada)

• Trust Companies (e.g., Citizen's Trust Company, Montreal Trust Company of Canada)

• Credit Unions (e.g., Coast Capital Savings, VanCity Credit Union)

• Investment Companies (e.g., Wood Gundy, Nesbitt Burns)

You need a financial institution for several reasons:

• Your money is safe.

• Your money can earn interest.

• You can write cheques.

• You can use a debit card.

• You can develop a credit rating and become eligible for a loan, mortgage, or credit card.

• You can save money.

• You can invest your money.

In this lesson you will learn some fundamental concepts that are associated with banking, and compare the services at different financial institutions.

Banking Fees

In order to keep your money at their institutions, banks charge fees on their accounts. They can range from $0.25 per transaction, to $30 per month for a flat account fee, depending on the bank and account. Regardless, not all banks are the same and these charges can add up quickly, so you need to pay attention!

If the fee for an ATM transaction to withdraw money is $1 and a person withdraws money twice a week, the banking fees for that person will be $104 a year. Over a five-year period, those fees invested at five percent would grow to more than $570!

People are often not aware of the amounts spent for banking fees. Recent studies also reveal that people are often charged more than $20 or $30 per transaction for overdrafts on their chequing account.

Banks and other financial institutions (credit unions, trust companies) offer a variety of services. However, few people know how to make wise choices when using financial services. Try to avoid: pawn shops, rent-to-own programs, cheque-cashing outlets, and payday loan advance services. They cost a lot!

When selecting a chequing account, consider the required balance, monthly fees, interest earned, cost of printing cheques, and charges for other fees and services. Assess the value of the service in relation to the fees.

Some tips when choosing a bank account:

• Check your statements regularly and make sure that you are not paying more than you should.
• Check out other accounts that your bank offers at least once a year to see if there is one that is better suited to your needs.
• Pay attention to other banks and what they are offering. Sometimes it will save you a lot of money to make the switch!
• When taking money out of an ATM, take it out of an ATM that belongs to your bank. Most of the time, your bank will not charge you extra. If you take it out of one belonging to someone else, they will often charge you $2 on the spot, in addition to fees from your bank. That $20 you just took out could cost you an extra $5!
• If you can't get money from your bank's ATM, take out a larger sum of money to lessen the percentage you are being charged. For example: $5 is 25% of $20, but only 8% of $60!
• Many stores allow you to take extra money out when you make a purchase which only counts as one transaction and saves you money over the ATM.

What is a debit card?

A debit card is a service provided by a bank. It is a banking card enhanced with automated teller machine (ATM) and point-of-sale features to become a debit card. It can be used for purchasing goods or services at various merchants. Each financial institution creates an identity for its debit card to customize the product and differentiate it in the market. Debit cards are linked to an individual's bank account, allowing funds to be withdrawn at the ATM and point-of-sale without writing a cheque.

What is an example of a debit card?

A debit card is a financial institution's ATM card with point-of-sale features. These cards may incorporate a specific acceptance mark (e.g., Visa or MasterCard). Payment is completed by signing a sales draft or by entering a PIN number, and then the amount of the sale is deducted automatically from the card holder's bank account. A debit card is accepted anywhere consumers use their Visa or MasterCard credit card.

Another type of deposit access card is an ATM card bearing an INTERAC, PLUS or CIRRUS logo that, when used at the ATM or merchant location that accepts INTERAC, PLUS or CIRRUS with the entry of a PIN, will automatically deduct the sales amount from the card holder's bank account.

A regular ATM card doesn't have a Visa or MasterCard logo, but instead has an INTERAC, PLUS or CIRRUS logo and is good only where the merchant accepts those brands or at an ATM.

Credit

What is this thing we call credit? Credit is a lot like a "reputation" that you acquire over a period of time. It tells banks and other companies how reliable you are at paying your bills and sticking to agreements of paying things off, such as a loan or credit card.

A bad credit rating can stay with you for up to seven years. For this reason, it is very important to manage your credit wisely. In few years, when you want to get a loan for a new car or another large purchase, you don't want the mistakes you make now -such as not paying the balance of the new credit card -to come back to haunt you.

In this lesson you will learn many concepts that are related to credit and debt, and the importance of a credit rating.

 

Borrowing money and my future goals

Borrowing money can be a good thing or a bad thing, depending on how you handle it. If you borrow wisely, debt is a valuable tool that helps you manage expenses over a period of time. It can be part of a strategy to help you achieve your education and career goals. But if you don't use debt with care, it can threaten your financial future.

So what do you do when your education and career goals are costly, and accumulating enough money to pay for them seems impossible? Borrow carefully! Keep these factors in mind:

Types of credit

There are many types of credit, with different features that make them appropriate in different conditions.

• Credit cards

provide convenience for purchases or cash for short-term emergencies, but they can become very costly if not paid off quickly.

• Student loans charge a lower interest rate. But they can add up to very large amounts, and must be paid off when you leave post-secondary education. Carrying too much debt can seriously affect your future options.

• Loans or lines of credit from banks, credit unions and trust companies can pay for large purchases or pay down high-interest loans if you can comfortably fit the payments into your monthly budget.

• Overdraft protection is a short-term loan from your bank to cover debits or cheques when there isn't enough money in your account. It's convenient, but adds costs to your transactions.

• High-cost loans like paycheque advances or some of the deferred payment plans from retail stores may appear attractive, but they can be very costly. Their very high interest rates and fees can drain away your spare cash.

Your responsibilities when you borrow

• Borrow only what you can repay. Be sure you'll have enough income to make the payments when they're due.

• When you borrow money, you're making a legal commitment, so you should understand your credit contract before signing it. If you aren't sure what the contract means, ask the loans officer to explain it.

• Make the payments as agreed. If you run into trouble, don't avoid it - talk to the loans officer and explain the situation.

• Keep your cards, PINs and passwords secure, and check your credit slips and statements. You're responsible for reporting any errors.

Using debt wisely

Your decision to use debt, whether for short-term purchases or to finance your education and career goals, may have positive and negative implications for your future.

• Short-term implications. You don't have to wait to accumulate savings before moving toward your goals. But interest on debt adds to the cost, and you have to budget for regular payments.

• Long-term implications. You can achieve your goals earlier. But taking on debt limits your future choices, because you'll have to pay it back, which will reduce the money you have available for other options. Building a positive credit rating by using debt responsibly can make financing easier in the future. But a negative credit rating will limit your options in many ways.

• Because debt is expensive, the best financial strategy is often to pay down debt as quickly as possible.

You can pay in the short term, or you can pay in the long term, but you have to pay. The longer you put it off, the more you have to pay.

Understanding Banking Paperwork

Banking involves paperwork. In this activity, you will explore how to read a basic bank statement. If you don't have a bank account right now, you will need one in the near future. If you do have an account, this may help you get more information from the statement you receive each month. This link shows the most common statements and the information they provide.

Banking Paperwork Explained

Understanding your bank statements helps you to keep a close eye on what is happening to your money. In rare cases, financial institutions will make mistakes or someone may have access to your account without your knowledge. It is your responsibility to look over your statements to make sure everything is correct.

Savings Accounts

Saving just 35 cents a day will result in more than $125 in a year. Small amounts saved and invested can easily grow into larger sums. However, a person must START TO SAVE.

Various savings plans are available to consumers. These include:

• Savings Accounts
• Term Deposits   
• Guaranteed Investment Certificates (GICs)
• Canada Savings Bond

Savings Accounts are offered by banks and credit unions as low cost options for putting money that you want to save. They generally don't have monthly service fees, but are instead on the pay-as-you-go plan where you don't have to pay to put money in, but will pay service fees per transaction to take it out. They are not generally going to make you a lot of interest (between .01 and 1%), but are good for short periods of time and for smaller amounts of money (less than $100). You also will have access to your money from any bank, ATM or online at any time.

If you have money that you don't need access to for a short period of time, then a Term Deposit may be an option for you. Term Deposits have set interest rates for terms up to a year in length, but you will have to pay a service charge to get your money out before the term is up, which may end up being more than the interest you made.

Guaranteed Investment Certificates (GICs) are similar to Term Deposits, but usually have a higher (more than $100) initial investment requirement and are for terms of a year or more. Consequently, the higher set interest rate will also be higher, which means that you will make more money, but remember that you will have limited access to those funds until your term is up.

The Canadian Government issues Canada Savings Bonds between October and December of each year, which means you can make an investment in your country! Bonds can be purchased for as little as $100 and can be for terms up to ten years. The interest rate is determined and guaranteed by the government, but is reassessed every couple of years to reflect current market trends.

When selecting a place to save your money, you need to consider interest rates, fees, balance requirements, length of time and how accessible your money will be (liquidity).

Identity Theft

Simon's Situation

When Simon lost his wallet, he thought it was a pain. He had over $50 in it, and his driver's licence and bank card. The next day he called the bank to replace the card, and applied for a new driver's license.

A few months later, at a roadside driving check, the police asked him to step out of his car and placed him under arrest. That's when he found out that someone had been using his identity to buy expensive jewellery and sound equipment. One store charged him with forgery, and the police became involved.

It took months of letter-writing, phone calls and explanations to convince the police, his bank, the collection agencies and credit bureaus that someone else using his ID was responsible for the crime and the debts.

Melissa's Mess

At first, Melissa was surprised when she got an email from her bank saying that the security department had detected suspicious activity on her account. It asked her to go to a special web page to confirm her account information and password. It's lucky the bank caught the problem on time, she thought as she entered the correct information.

But she was more surprised the next day when she went to pay for a movie with her debit card - it was rejected. She checked her bank balance and found her account was empty. All her savings were gone. She was furious when she called the bank to ask what it did with her money.

The bank said she had spent the whole amount in online purchases, using her password. Melissa said she had not bought anything online, but the bank said she was responsible if anyone used her password. Melissa was lucky, because she still had the email asking for her password. The bank said that she was the victim of an online fraud called phishing, and agreed to refund her account. But it took many pages of paperwork and several months to get the problem cleared up.

Daniel's Dilemma

Daniel was popular and had many friends on his networking page. It was a great way to keep in the loop and let friends know about his birthday party. So naturally when he moved into his own place, he posted his new address and phone number.

But it wasn't long before Daniel started getting unwelcome messages in the mail - bills from stores he didn't shop at. Credit card bills from card companies he didn't use. And the more he ignored them, the more threatening they became. When he finally phoned to tell them they had the wrong guy, he found out they had his name, address, even his birthday. And many of them wouldn't believe it wasn't really him until they compared his signature with the one setting up all the new accounts.

Daniel had to file a police report saying that someone was using his name and address. The officer said they probably got all his personal information from his networking page. It took months of paperwork to sort out all the false charges, and some of the stores refused to change the reports on his credit record. He was so careless, he was a bad risk, they said.

Theresa's Troubles

Theresa first noticed her magazine subscription was late. Then she noticed she wasn't getting her mail. She contacted Canada Post to ask what happened. She found out that someone had asked Canada Post to divert her mail. For ID, someone had used a drivers' licence that Theresa thought she'd lost.

Soon after, she found that someone had received a credit card in her name. And a department store credit card. Bills addressed to her were mounting up, but they weren't being paid.

Theresa was lucky - she was able to pay her own bills before her electricity or cellphone were cut off. But she didn't feel so happy when she had to start contacting all the stores that were sending her bills. She also had to convince the credit card company that she wasn't responsible for the bills in her name.

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Identity theft is a new type of crime, but it's growing fast. It happens when someone obtains your personal information and uses it without your knowledge to make purchases and commit crimes such as fraud. Police say Canada has over 20,000 cases of identity theft a year, and the number is growing.

Identity thieves build up a profile using pieces of information, such as a Social Insurance Number and a date of birth. With two pieces of ID, they can apply for banking services, or change the address on existing accounts. When they build up an identity, they can take over accounts, transfer bank balances, apply for loans and credit cards, and purchase items.

Most internet users have seen "phishing" emails - messages from scammers trying to gain confidential information such as a password by pretending to be a legitimate email or website. Fraud artists can also look through your garbage or recycling box for bank cheques, insurance forms, pre-approved credit card applications, tax forms and other bits of personal information. New computers and photocopying machines make it easier for thieves to copy or modify documents and create identities. With more people posting personal information on social networking sites like Myspace, Facebook and Bebo, scammers can often find all the personal details they need to set up a phony identity.

Some scammers post ads for jobs, asking applicants to send copies of documents like social insurance cards, birth certificates and driver's licences. Others use phony websites that ask for personal information to establish an account or to "verify" an existing account.

What can you do to protect yourself from identify theft?

Here are some tips:

• Don't give out your Social Insurance Number, birth date, or other personal or employment data except to a reputable agency.

• Don't throw any identifying information, like bank statements or credit card offers, in the garbage or recycling box. Shred or cut them up.

• Never leave receipts at bank machines, bank wickets, trash cans or gasoline pumps.

• Pick up your mail as soon as possible.

• Watch for late bills and mistakes in your monthly statements.

• Review your bank statements to make sure that all the transactions are yours.

• Don't carry more ID than you need, and don't leave ID in your vehicle.

• Report lost or stolen identification and debit or credit cards to the card issuer and Canada's credit bureaus (Equifax Canada at www.equifax.ca and TransUnion Canada at www.transunion.com.

• Check your credit rating annually to ensure it is accurate and up-to-date. (You can request a free copy by mail. Agencies may charge a fee for requests by internet.)

• Report identify theft to the police as soon as you are aware of it.

Security online

• Don't give out personal information over the phone or internet.

• Don't post personal or employment details on social networking sites like Myspace, Facebook and Bebo.

• Check the security and privacy settings on networking sites and limit personal access to trusted friends.

• Share your personal webpages only with trusted friends.

• Don't write down PINs or passwords, and choose difficult passwords.

• Never give your PIN to friends or post them online.

• Don't use personal data like addresses or phone numbers in your passwords.

For more information about frauds and scams, visit the Safe Canada website (www.safecanada.ca).