Today, almost half of all American adults use an online banking service [source: Cnet News]. In addition to convenience, online banking gives people new methods of credit management, debt management, as well as control over their personal finances. In fact, the majority of online banking transactions involve credit cards, and that number is growing [source: NetBanker]. Whether you're applying for credit, checking your statements, making a payment or working on a budget to reduce debt, online banking can help manage your credit.
Apparently we can use the help -- at the end of 2009, revolving debt (such as credit cards) for Americans totaled $874 billion [source: Federal Reserve]. The good news is, that represents a decline over previous years, but the fact remains that heavy credit card debt isn't healthy for individuals or the economy as a whole.
There are many ways to take control of your finances and start reducing your debt, but one of the best is to have greater access to your finances and gain a greater understanding of your spending patterns. This article will offer some tips on how to use online banking to accomplish those goals -- and help you reduce your debt in the process.
Online Banking Basics
Banks offer a variety of online services to members who hold a checking or savings account, or have a credit card issued by that bank. The simplest service offers access to a checking account so you can view transactions and transfer funds. Checking your account balance just requires you to log in and click on the proper account. Your online statement will show you deposits and withdrawals, their specific amounts, and the person or business that the transaction came from. If you wrote a physical check, it will show the check number. You can order a copy of the check, but the banks will usually charge a small fee for this service.
It's also possible to pay many of your bills directly from your online banking account. For example, your local electric company will have a financial account set up with your bank. You can then have your online bank send money from your checking account to the electric company to pay your bill each month. You don't even have to remember to do this -- the payments can be sent automatically on the date of your choice. Just remember to keep enough money in the account.
You might have other financial accounts with your bank that can also be managed online. This could include home equity loans or savings accounts. You can even apply for a new credit line or a home equity loan online with some banks.
Of course, there are fees associated with online banking. Basic online access is usually free, or may carry a small monthly fee. If your account is intended to be used primarily online, you might be charged a fee if you go to a physical bank and interact with a teller there. Like most checking accounts, there may be minimum amounts which must be kept in the account to avoid penalties or additional fees. Make sure you talk with a bank officer when you set up your accounts to make sure you find the right combination of services and fees to fit your specific needs.
Now that we've covered the essentials of online banking, we'll see how you can use online banking to help manage your credit.
Credit Management with Online Banking
Accessing a credit card account online makes it much easier to manage your debt. For one thing, you can check your statement at any time instead of waiting for a monthly statement to be mailed to you. Monthly paper statements can lag weeks behind current activity on the account, so online access gives a much better indication of day-to-day use.
If more than one member of your household has a card on the same account, you can check online to see who has been using it and how much they've been spending. Some credit cards allow you to set limits on individual cards to control spending, especially helpful if the other card-holder is a son, daughter or other dependent.
Online banking also makes it easy to see how much interest you're being charged each month. When you log in to make a payment, you can check how much of the payment is pure interest and how much will go toward paying down your balance. To reduce debt, you'll want to pay more than the minimum monthly payment.
Looking at online statements (both checking accounts and credit cards) will allow you to make a formal budget. Some banks have built-in budgeting programs, and others will offer a breakdown of where you spend your money each month. That makes it easy to see how much of your budget is going to restaurants, shopping malls or to pay for gas, and you can structure your new budget to make savings where necessary.
One way that credit cards make extra money is by charging you late fees. You can avoid these fees -- which might amount to $30 or more each time you're late -- by setting up automatic payments. You can do this whether your credit card was issued by your primary bank, or if it came from a bank separate from your checking account. Your credit card's payment page should give you the option to set up a recurring monthly payment. After you select that option, you'll be asked to enter information about your checking account, usually your account number and your bank's routing number. You can find these on a check or on your bank's Web site. You can set a specific day of the month for the payment to occur -- make sure you set it so that your creditors are paid on time, and be sure that your checking account has enough funds to cover the payment.
How can credit reports help you manage debt? Find out on the next page.
Track Your Credit Rating
Another key to credit management is keeping track of your credit rating. Your credit rating is affected by a variety of factors, including late payments, total outstanding debt and total available credit. Obviously, late payments hurt your rating, along with heavy debt. However, having a lot of open credit accounts is actually good for your credit rating, as long as they're mostly clear of actual debt. So don't cancel unused credit accounts.
There are two ways online banking can help you track your score. First, in the U.S., everyone is entitled to one free credit report from each of the three credit bureaus -- TransUnion, Equifax and Experian -- per year. Some banks offer access to these reports directly through your online account. Otherwise, you can get it at Web sites like annualcreditreport.com. Your bank may offer other credit reporting or scoring services for an additional fee.
The second option, offered as a premium service by some banks or credit card companies, is a credit monitoring program. This kind of service watches your credit report at any one (or all three) of the credit bureaus. You can set up alerts for suspicious activity: if someone tries to apply for a credit card in your name, or if your credit rating dips below a certain level. That lets you know exactly how well you're doing at managing your money and your debt, since drastic declines in your rating mean lots of late bills or too much debt. The protection such services offer from potential identity theft is helpful as well -- nothing makes it harder to manage your debt than an identity thief racking up bills in your name.
Related HowStuffWorks Articles
- Brandon, Emily. "Checking Account Fees Reach Record Highs." U.S. News & World Report, Oct. 19, 2009.http://www.usnews.com/money/personal-finance/articles/2009/10/19/checking-account-fees-reach-record-highs.html
- Bruene, Jim. "Online Financial Services Scorecard: March 2008." NetBanker. May 8, 2008. Accessed Jan. 20, 2010. http://www.netbanker.com/2008/05/online_financial_services_scor_1.html
- Federal Reserve System. "Consumer Credit." Jan. 8, 2010. Accessed Jan. 20, 2010. http://www.federalreserve.gov/releases/g19/Current/
- Whitney, Lance. "Online banking is booming." Cnet News, June 16, 2010. Accessed Jan. 20, 2009.http://news.cnet.com/8301-1001_3-10265409-92.html