II Other Bank Services

Trusts. A trust arrangement exists when a bank provides safekeeping and management of funds for individuals, estates or institutions such as pension funds. The bank’s job is to administer the money entrusted to it wisely and for the benefit of the owner. The bank receives a fee for managing these funds.

Currency exchange. Banks can buy and sell foreign currencies for their own benefit or for their clients. Importers, exporters and travelers are major users of these services. Even domestic travelers may purchase travelers’ checks issued by banks.

Safekeeping. Many banks rent safety deposit boxes in their vaults to persons seeking a safe and secure place for their valuables.

Credit cards. Some banks derive significant revenues from operating bankcard programs. There is usually an annual fee to use the credit card, and the consumer pays interest on the unpaid balance. Merchants pay a fee to the bank as well.

Letters of Credit. Banks may aid commerce by writing letters of credit. In these documents, the bank guarantees one party (such as sellers) that payment will be made if certain conditions are met (such as the delivery of merchandise). Letters of credit are common when goods are bought or sold abroad. There is a fee for providing this letter of credit.

Investments. Banks are permitted to buy U.S. government bonds for their own accounts. Banks may make money in trading such bonds and from the interests paid by the government to the holders of such securities.

Consulting. A growing business for banks is to give advice to other businesses. Especially significant in recent years is the assistance provided to firms involved in corporate mergers.

III Consumer credit

Consumer credit provides cash, goods or services now, while spreading repayment into the future. In this way credit enables you to enjoy your purchase even before you have paid for it. But there are two important strings attached to every credit purchase: credit costs something, and the principal, the original amount borrowed, must be paid back. If you are thinking of borrowing money or buying something on credit, you will want to know how much this credit will cost you and weather or not you can afford it. Then you can shop for the best terms.

Credit costs vary from one lender to another, so it pays to shop before you sign anything. Federal law requires that the lender tell you the total finance charges and the annual percentage rate or APR.

The finance charge is the total amount you pay to use credit. It includes interest costs and any other fees (such as service charges and insurance) that the seller or lender may be entitled to add to the loan.

The annual percentage rate or APR is the cost of credit calculated as a percent on an annual basis.

Credit has its advantages and disadvantages. The principal advantages of credit are:

Immediate possession. Credit enables us to enjoy goods and services immediately that we might otherwise have had to do without or postpone.

Flexibility. Credit allows us to time our purchases so as to take advantage of sale items or other bargains even when our funds are low.

Safety. Credit cards provide a safe and convenient means of carrying our purchasing power with us while we are shopping or traveling.

Emergency funds. Credit gives us a cushion in an emergency (like an automobile breakdown when money is needed to get back on the road).

Character reference. The regular payment of bills is recorded in a person’s credit history, and this record can be used as a character reference.

Here are some of the disadvantages of buying on credit:

Overspending. Sometimes credit cards make it too easy to spend money. Then, as the debts mounts, it is often difficult to make the necessary monthly payments.

Higher cost. It usually costs more to buy on credit than for cash. One reason is that stores offering credit often charge more than those that sell only for cash. Another is that interest or other charges are often added to the cost of goods sold on credit.

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