Paula is joined by Ashley Chambers of Chief Financial Credit Union to talk Banking Fundamentals.
What is the difference between a credit union and a bank?
We also cover the differences between credit score and auto credit score, setting up a beneficiary, and more.
Reach out to Ashley with any additional questions you have: AshleyC@chiefonline.com
Chief Financial Website: https://chiefonline.com/
Contact Paula Christine:
Website:http://paulachistine.com/
Email: paula@paulachristine.com
Paula: Hi, I'm Paula Christine, and welcome to Beyond the Paycheck. Living paycheck to paycheck and struggling to get ahead really sucks. What if you could take control of your money and have that life you dream about? I know that you're saying, "Yeah, right." But it can happen with knowledge and commitment. That is my goal. To provide you with the knowledge to take control of your money. It's up to you to make the commitment.
When my son was younger and got his first job, he opened up his first bank account. And he's probably gonna kick my butt for sharing this with you. But he had so many fees because he would use his debit card and just thought it was like never ending cash in that account.
So he had a ton of insufficient fees. Just because you have money in your account doesn't mean that's an accurate balance. And that he had to learn that lesson. So I'm sure he isn't the first person to make that mistake. So I've asked Ashley Chambers from Chief Financial Credit Union to discuss the fundamentals of basic banking for us.
Welcome Ashley.
Ashley: Thank you for having me.
Paula: So there's a couple different types of ways that you can have a checking or savings account. So there's a credit union and there's a bank. What are the differences between the two?
Ashley: Absolutely. That's a really common question that I get and there's huge differences between the two.
Credit unions and banks differ in the way of being a for-profit versus a not for-profit institution. So banks are a for-profit institution, meaning whatever they make above and beyond paying their employees, goes back to their shareholders. Their shareholders are a small group of individuals.
At credit unions, every one of our members is a shareholder. So the minute you join the credit union, whatever credit union it is, you become a shareholder of that credit union, which means anything we make above and beyond paying our employees goes right back to our members in the way of lowest rates on auto loans, highest rates on deposits, checking accounts that pay back, that sort of thing.
And that's across the board for all credit unions. And I have to say that's the biggest difference between the two and the one that defines us the most.
Paula: Yeah. I I've always banked with a credit union. I know that my interest rates on my car loans and stuff has always less than if I went to the bank.
Ashley: Absolutely.
Paula: You have different types of accounts. So if let's say that I'm a young person coming into the credit union for the first time, and I'm gonna open up a checking account, a savings account, a CD, a money market, where are all those things?
Ashley: So when you first start out, especially banking in general, you always wanna start out with the basic savings account and that's going to allow you to enter into an agreement with the financial institution.
And that's a very basic agreement saying "I wanna do my banking with you," and we're going to form this relationship. Forming a relationship with your financial institution is truly key for the longevity of that relationship and being able to get the loans and things that you need in the future.
But to start out, you always wanna have a savings account. And then you wanna couple that with a checking account. Those run in tandem with one another. And typically the checking account is what's used the most. And the savings account is used for savings, as the name suggests. There's a ton of different types of checking accounts at Chief, I know we have three different types that are main types of checking accounts.
One of the biggest misconceptions that people have is that you have to pay fees with a checking account, that fees and checking accounts come hand in hand, and that's simply not the case. In fact, checking accounts are designed to make your money work just as hard for you as you do to earn it. And that's especially true at Chief and there's those sort of things really come into play when you're starting your relationship with that financial institution.
So for example, we're a young individual. We go online or we come into a branch and we wanna open up an account. We'll open up the savings account and then we'll discuss what that individual uses. I believe you had said your son is a debit card swiper, is that correct?
Paula: Correct.
Ashley: Well, that makes two of us.
Paula: He's gonna kill me for this.
Ashley: I'll openly admit Amazon is an addiction of mine, so I understand. It's way too easy, way too easy, but we have accounts that actually pay you back when you swipe your debit card. So it's a way of making your money work for you and you don't get any fees associated with that. It's also about education, right? Because we all know that there is a limit to the amount of money we have, whether or not we want to consciously acknowledge that. One of the things that Chief does while we were setting up the account is go over things like that. You had mentioned there were a couple of fees and there are fees that people can get caught up in if you are spending money that you don't have, but one of the crucial parts of that relationship, that Chief and credit unions really stand apart on is the education. When you first open up the account, that means we're going to go over things like your limit, like knowing your balance. Maybe putting up some auto payments to where you're automatically saving every week, if you have that sort of income coming in consistently or biweekly.
It's getting to know the member, just as much as the member wants to know the financial institution, because you should really know where your money is and how it's being utilized. That's the biggest thing.
Paula: Okay. So let's go back and talk about CDs and money markets.
Ashley: So those are probably two of my favorite products. A money market differs from a CD in the way of being able to deposit more funds into it. So if I were to open up a money market, most places have a minimum balance of X dollars. And I put that in there. It's going to earn a interest rate that's higher than what you're going to earn on a base savings account.
So your savings account will earn a little bit of interest, but very, very little. So if you have extra funds coming in, we suggest opening up a money market. So you can keep depositing in that. And as your balance grows, you're gonna earn more in interest. That's gonna come back right into that money market account.
Now the difference between a CD and a money market, some people call it a share certificate as well, is you start with one lump sum of money. And that lump sum of money stays static throughout the term of the loan, which can vary from three months all the way up to 60 months. And what that does is it's going to compound the interest, say you're earned.
So you get one lump sum at the end of the term of the loan. Those are usually good if you're able and you can lock up funds for a set amount of time. I like at Chief that we have CDs that are three months in length because we all know the market's changing and fluctuating, but we do have those shorter term CDs that we can still service our members and give them that higher interest rate. Slightly higher than what you would see in a money market and still be able to keep their funds available to them within a reasonable timeframe.
Paula: So one of the things that I talk to my clients about is a money market, and that is a great place to keep their emergency account.
Ashley: Yes, absolutely.
Paula: It is liquid. And you can get at it if you need to for that emergency. And it does tend to give you a higher interest rate than your savings. So if I walk into at financial institution and I wanna open an account, what do I need to bring with me?
Ashley: Well, speaking for credit unions, it's going to be $5 is all you'll need to come in and join the credit union. Back in the early 2000's, there was a law that changed that allowed pretty much anybody to join a credit union. As long as you were within the areas that the credit union is defined at. It really opened up the membership and allowed us to be on the level of a bank when it came to servicing individuals.
So when you come in, it's $5 because as it gets started, you get the opportunity to become a member and then subsequently a shareholder. So that $5 kind of is your share into the credit union. You have rights to come to our annual board meeting, those sort of things. It's quite a different experience, but it's only $5. You come in and we're automatically going to open you up a savings account with that $5.
And it's gonna stay locked in there. That's pretty much the only "fee," but it's not really a fee. It's to make you become a shareholder within the credit union. Other than that, you would open up a checking account. We don't have any minimum balance or anything like that. And it's going, like I said, it's going to be going over the education of the account and what you wanna utilize the account for.
And then opening up the appropriate checking account to go in there. And then if you're going to be able to put money away each week, or every time you get paid, we'll open you up those money market or those side savings account to allow you to say, okay, this is my emergency fund. This is my vacation fund. Whatever you allocate your funds to.
Paula: Do you also need to bring your driver's license, social security number, information about beneficiaries? You're gonna wanna make sure you have a beneficiary in all of your accounts?
Ashley: Yes. So a state issued ID is required for entrance into a credit union as, as well as a social security number, valid social security number.
And those are both, that's just for your protection. And then the $5. The beneficiary is a very, I'm very glad that you brought that up. Thank you. It's a very looked over part of people's account opening process. You don't have the, all the information, so you don't think you can put a beneficiary on the account or you want to come back and get the information and then add it later on, but it slips your mind, those sort of things. A credit union, we can definitely work with you and set up a reminder and give you a call to see if you follow up, if you have that information, but a beneficiary on the account? It's crucial, especially if something were to happen, your funds are then tied up in the system and not going where they actually should, to the people that actually deserve it within your family and your network.
So setting up a beneficiary at the time of opening up the account, especially your savings account, is key because that's going to be what saves people a lot of hassle, if something were to happen to you at some point.
Paula: Okay. So I know you have other services that you offer and one of them would be a credit card. What is the difference between a debit card and a credit card?
Ashley: There are major differences between a debit card and a credit card. People ask me this question. And I often say it's like comparing an apple to a carrot. So a debit card is attached directly to your checking account. Meaning every time you use that debit card, those funds are gonna come out of your account.
Now we have accounts that can be set up to where, you have the checking account, you swipe your debit card. Once you hit a certain balance on your checking account, zero typically, the debit card will no longer be allowed to be swiped. It'll deny the transaction. Now we do offer services that'll allow the transaction to go through for a fee. And then if you can put the money in there, we can work with you, but that's in an emergency case. Not for us constant swipers.
What I suggest for that, especially starting out, I can recall being 18 and getting my very first credit card and not understanding what that was. And that's a easiest way I can define it is a revolving line of money that the individual has.
So let's say that you get a credit card and you have a $250 limit on that credit. A good rule of thumb is to never spend more than 30% of the credit card's total limit, and then to pay it off at the end, when you get the credit card statement, you wanna be able to have a way to grow your credit. And the credit card is going to be the way to start to grow your credit.
That's gonna be one of the first tools that you use. And that's why I said a lower balance of $250, because you wanna get acclimated with the credit card, get acclimated with saying, okay, these aren't my funds that I'm spending. This is the credit card company's or the credit union's funds that I'm spending.
And then I will have to pay these back. But in order to build credit, you have to have a little bit of credit. And that's what the first credit cards will actually do. But that's completely different than your debit card, which is attached directly to your checking account. And those funds are going to come directly out of your account at the time of the swipe or the time of the purchase. In my case, if your card's linked to Amazon.
Paula: My card's linked to Amazon too. So I remember back in the day, when I got my first credit card, it was linked to my bank account. Somehow that was, I can't think what it was called. I had to keep $500 in the bank to make sure that I was leaving my minimum balance on the credit card. Do you know what I'm talking about?
Ashley: Yeah, it's a secured credit card so that's also an option and something that we suggest for individuals that are very... you're starting out brand new and you do have the funds to put up against that. So typically again, we use the $250 rule. What you would do is you would come into the credit union or go online and you would have $250 already.
On hand, so to speak, we're going to take those funds and we're going to freeze them on your savings account. So they'll be in your savings account, but it'll be frozen, meaning you won't have any access to it. And then we'll give you a credit card for $250. What this does, it is allows you to use the credit card, build up your credit as you planned, just like an unsecured credit card that we just suggested, or just discussed, excuse me. But it does take the onus off of the individual because the funds are frozen in the savings account. So if something were to happen, the credit union or the credit card organization is going to still get their funds and you will not be detrimentally affected on your credit score at a young age.
This is a product we usually see if the individual does not have a co-signer for an unsecured credit card. Or under the age of 21 with no credit history, but again, we'll typically do the unsecured credit card as well, because we do wanna instill those good banking habits and understand that. And we understand if you're younger, having $250 is a lot of money just to have on hand to freeze and then to put subsequently towards credit.
Paula: But it's a great way to get, to build your credit score, cuz you know, some people don't develop credit. Until they maybe go and buy their first car or wanna purchase a home and then they don't have any history. So it makes it really difficult to get a decent interest rate or even to get approved.
Ashley: Yes, that's huge. And one of the things that became very apparent to me in my life is that your auto loan credit score is different than your regular credit score. So you always want to, even though you may be able to pay outright cash for an auto loan for your first car, for example, you wanna see if you can take out a loan on that and then use those funds, set 'em aside and then pay that off, cuz that's gonna be the quickest way to earn up your auto loan credit, because if you don't have any credit on owning a vehicle, new or used, it's going to be harder for that financial institution or dealership to get you approved. So that's just kind of a little bit of rule thumb. I became 24 and went to purchase my first vehicle and got a higher interest rate than I anticipated given my credit score. It was because I didn't have any auto loan credit score history.
Paula: Oh, I didn't know that. If I'm purchasing a car for my child, it would make sense then to put them on as a cosigner. When they're younger, so that would help build up their auto credit score.
Ashley: Absolutely. Every payment that's made will then count positively towards them as well. So we usually have them, and then you as a co-signer, or like you said, you and then them, as a co-signer, and it counts towards both of your scores. And again, that's going to allow us to get the approval process that much quicker. If you have the positive credit history to back this individual, who's lacking in the credit simply because of their age and they're they're just starting out.
Paula: Okay. So I have a couple more questions for you. One is your money at the financial institution. I know they're called differently for banks or credit. The money at that financial institution is insured.
Ashley: Absolutely.
Paula: How does that work?
Ashley: So with a bank it's called the FDIC. And with a credit union, it's called the NCUA. National credit union association that allows your funds to be secured up to $250,000.
And that's the same for a bank. It just simply means that if something were to happen to that financial institution, your individual funds are secured. You are not going to be affected by that. And I say, it's got a limit, but we also have ways to get that limit where you can have the funds all in one spot and it all be protected as well.
But. It's important to note that both banks and credit unions do have your best interest in mind in the way of securing up your funds, if something were to happen to that bank or credit union.
Paula: So how do I choose not necessarily between a bank and credit union, cuz we already know the differences, but how do I know which financial institution is right for me?
Do I go to a place that's brick and mortar or online? I mean, how do we. Determine what's the best solution?
Ashley: It's interesting that you ask about brick and mortar versus online, because what we've found is a lot of people like to have the initial account opening be in person, but then everything else be online or through the phone system, which is quite interesting.
So we do definitely pride ourselves on having that brick and mortar location. And we have quite a few. I would say for the individual though, a brick and mortar truly isn't necessary anymore with the capabilities that came out of the pandemic in the way of live chats in the way of video chats in the way of getting information securely sent across systems.
So we can appropriately open up the accounts. If you are more comfortable going into a brick and mortar, I would obviously suggest a financial institution that has a location, maybe necessarily isn't close to your home, but close to your work, close to a hobby that you have. That way you can go in there at ease.
But again, most of what you need to do can be done right online. And then over the phone and through our online chats, it's the quickest way that we find people these days like to get things done above and beyond coming in and sitting down and opening up an account. It's really on the individual's need. I would say there are financial institutions that are fully virtual.
For myself individually, I do like to have the contact of an individual at my financial institution, but it doesn't matter to me if that individual is in a brick and mortar location or remote as long as they can help me with my needs, which they always can.
Paula: I can't even tell you the last time I've been in my credit union. It's been years.
Ashley: Yeah, well they have those ITMs now as well, which are they're replacing the tellers of today. They're really fully capable of doing anything that you want. I know the biggest thing is ATMs can only give out a certain amount where the ITMs can do that. And so much more. You can get singles, you can deposit checks, you can speak to an individual. It's really nice. It's really cool. It's a wave of the future. So stay tuned for that to become really common.
Paula: Okay. I had no idea what an ITM was. That's the first time I've learned about that. And I didn't know about auto credit score, so that's really good too.
So Ashley, I wanna thank you so much for spending time with me today. If someone has questions or wanna get ahold of you, how can they do that?
Ashley: Absolutely. My email is Ashley C. So ASHLEYC at chief online.com. I'm very in tune with my email. I'll respond within one business day and that way, if you have any questions at all, I'd love to discuss with you further, whether it be about Chief or just overall getting ahead of the system and not having to live by paycheck to paycheck.
Paula: Thank you, Ashley. And if you'd like to reach me, you can reach me at Paula@PaulaChristine.com, where you can visit our website at Paulachristine.com. Thanks again, Ashley.
Ashley: Thank you.