What is a bank?
A bank is a private institution that accepts deposits, safeguards your money, and lends it out to others at interest. Banks are for-profit businesses — they make money by charging borrowers more interest than they pay to depositors.
Types of bank accounts
Checking accounts
A checking account is designed for everyday spending. You can deposit money, pay bills, use a debit card, and write checks. Most checking accounts pay little to no interest — their purpose is access, not growth.
Savings accounts
A savings account is designed to hold money you don't need immediately. It pays interest — the bank pays you a small percentage for keeping your money there, because the bank uses that money to make loans. A high-yield savings account (often online) can pay significantly more than a traditional bank.
How do banks make money?
Banks profit by borrowing money from depositors at a low rate and lending it to borrowers at a higher rate. The difference is called the net interest margin. For example, a bank might pay 2% interest on savings accounts while charging 7% on car loans — keeping the 5% difference as profit.
FDIC insurance — your money is protected
The Federal Deposit Insurance Corporation (FDIC) is a government agency that insures your bank deposits up to $250,000 per account if a bank fails. This means even if your bank goes bankrupt, your money is safe up to that limit. Always check that a bank is FDIC-insured before opening an account.
Types of financial institutions
| Institution | Who owns it | Best for |
|---|---|---|
| Commercial bank | Shareholders (for-profit) | Convenience, broad services, many ATMs |
| Credit union | Members (not-for-profit) | Lower fees, better rates, personalized service |
| Online bank | Private company | High-yield savings, low fees, no branches |
The Federal Reserve
The Federal Reserve (the "Fed") is the central bank of the United States. It does not offer accounts to individuals, but it controls the federal funds rate — the interest rate banks charge each other for overnight loans. When the Fed raises rates, borrowing becomes more expensive for everyone. When it lowers rates, borrowing gets cheaper. This is why mortgage rates and car loan rates change with the news.
Key vocabulary
| Term | Definition |
|---|---|
| Interest rate | The percentage of a loan or deposit paid over a period of time |
| FDIC | Federal Deposit Insurance Corporation — insures deposits up to $250,000 |
| APY | Annual Percentage Yield — total interest earned in a year including compounding |
| Compound interest | Interest earned on both the principal and previously earned interest |
| Net interest margin | The difference between what a bank earns on loans and pays on deposits |
| Federal Reserve | The central bank of the U.S., which sets monetary policy |
| Overdraft | Spending more than your account balance — banks often charge a fee for this |