This post was written in partnership with Victoria Ko.
One of the most important steps in setting up your new life in North America is opening a bank account. In our previous post, we provided an overview of 3 of the most common financial institutions in the US and Canada: traditional banks, online banks, and credit unions.
Ready to open your first account? Hold that thought!
First, you need to decide what type of account you need to open.
We are going to review the difference between the two most common bank accounts: checking and savings. We will also discuss what a credit score is, and why building a good credit is so important to setting yourself up for financial success.
So let’s dive right in!
What is a checking account?
Simply put – checking accounts allow deposits and withdrawals. Funds are accessible via check, debit card, and ATMs.
Unlike savings accounts, checking accounts are meant to be places where you can deposit and withdraw funds as often as you like. Most banks offer unlimited withdrawals on checking accounts for this very reason.
To open one, you typically need:
- Government issued ID
- Social security number or national equivalent
- Something with your address on it – you can get creative here. Consider a utility, cable, or internet bill. Sometimes a library card with proof your residence might do the trick!
What is a savings account?
Just like their name implies, the goal of savings accounts is to help you save your money.
Unlike checking accounts, they tend to have limits on withdrawals and deposits. Savings accounts earn a small percentage of interest, and are a valuable wealth creation too. Many banks offer savings accounts in addition to checking accounts.
You should choose a savings account based on the interest rate. The higher the rate, the more you earn. Typically, High Yield Savings Accounts (HYSAs) offer the highest interest rates, and are the most attractive option.
However, there’s something to be said for the lack of friction that having a checking account and bank account in one place allows for. If you’re someone who doesn’t like setting up auto withdrawals, starting with a savings account with the same bank as your checking account may be a good baby step! You can always research and open a HYSA with a different bank later.
If you’re still confused, this this NerdWallet table to compare and contrast checking and savings accounts:
Now that you know the basics of checking and savings accounts, you’re ready to take your next step – choosing a bank!
We’ve outlined a set of 5 of the most important factors to consider when opening a bank account.
- Physical location / branches
- If you’re someone that likes to go to the bank in person, or wants the peace of mind of a branch, you might choose a bank that has many branch options.
- On the other hand, credit unions typically have no physical presence, but offer competitive rates on various products. If you don’t mind going to a branch in person and qualify for the terms, you might want to consider joining one.
- Overdraft protection
- Did you know that in 2019, banks charged more than $11 billion in overdraft fees? You are not a charity – so stop paying your hard-earned money to the bank fo rno reason!
- This protects you from accidentally withdrawing on funds when you don’t have enough in your account. When this happens it’s called overdraft, and you typically have to be a penalty fee.
- Overdraft protection prevents you from drawing on funds that don’t exist.
- ATM fee reimbursement
- This is especially important if you choose a bank that doesn’t have many ATMs! Many banks offer ATM fee reimbursement at no extra cost – so this is an important perk.
- Transaction fees
- If you plan on sending money back to relatives and friends in a different countries, be sure to check the transaction fees that banks charge.
- These days, companies like @revolut are revolutionizing international transfers – explore these types of options and compare fees!
- Financial planning resources
- Are you looking for financial planning help? A potential mortgage? Different banks have more robust offerings, and their attractiveness depends on what you’re looking for.
Why is opening a bank account so important?
- Safety: Money is safer in the bank than underneath your mattress. Depending on the economic situation of the country that you came from, this might seem uncommon.
- Legitimacy: From paying for utility to finding a place to live, your bank account is a signal of legitimacy to counterparties that you will be engaging with.
- Getting Paid: Enables you to get paid! Many firms pay employees via direct deposit, so it’s essential that you have a bank account opened to receive payments.
Now you’re ready to open your first bank account! What are some questions you had about banking that you wish you’d known before getting started? Share in the comments below.