The ups and downs of interest
When you borrow money from a bank or credit card company, "interest" is what you pay to use money that isn't yours. When you save money at a bank, interest is the money the bank pays you to put your money in a savings account. The bank pays you because it is "borrowing" or using your money to lend to other borrowers, but the U.S. government makes sure it has enough to pay you back when you want it.

The more money that is in your savings account, and the longer you keep it there, the more money the bank will pay you. The bank multiplies the amount by the interest "rate"; the higher the rate, the more money you get. Getting interest on your money is a good reason to save it in a bank account.

The interest rate is different for different types of accounts. On a basic savings account, it may be about 2 percent. That may not sound like much, but it is more than you would have if you were to keep it at home — and since you don't have easy access to it, you're less likely to spend it on impulse. It's a good way to start managing your money.

Saving: The "magic" of compounded interest
Another good reason to save money in a bank is that for certain types of accounts the bank pays "compounded interest." This means that you earn interest on the money you put in the bank in the beginning and on the money the bank has already paid you in interest. This process continues each time the bank "compounds" the interest, which could be daily, weekly or monthly. It means you earn more money faster.

Here is an example of daily compound interest: If someone gives you a penny and offers to double the money every day for a month, how much would you have at the end of the month? $5 dollars? $50 dollars? You would have $10.7 million. That's exaggerated because you would have trouble finding a bank to pay you 100 percent interest compounded daily for 30 days, but you can see that earning interest on interest can really boost your savings.

Borrowing: The other side of compounded interest
Compounded interest can be a problem when you borrow, especially if you're borrowing on a credit card. Every time you use the card, the company is lending you money (which becomes your "balance") and charging you interest and fees (unless you pay the balance in full every month).

The younger you are and the less credit you have used, the higher these rates and fees may be. (That's because young people don't yet have a track record for paying their bills.) The interest rate could be 20 percent or more. And when that is compounded, your balance can go up very very quickly. That's why it takes so long to pay off a credit card if you only pay the "minimum" that the credit card company asks you to pay. The less you pay each month, the faster that balance is going to go up.

Young people: A "target" market
Just like any other business, credit card companies are always looking for new customers, and young people are a large group of possible new customers. The companies compete with each other intensely, and that means they often make very "creative" and enticing offers to young people. These offers may include a free fun item or a similar attraction. The problem is that young people may not understand all the pieces of the offer, and since they have little or no history of using credit, the terms can be very costly. Beware: At age 18, these offers may start coming. Be prepared to choose wisely.

Warning: If it sounds too good to be true, it probably is
Congratulations! You are already approved for a Platinum Splurge credit card! We are waiting to send you a new card in your name with a credit limit of up to $800! And that's not all, sign and return your application within 10 days and we'll send you an authenitc Designer Brand T-shirt! Just think: Not only will your new card help you build credit in your name, you will enjoy having a respected form of identification, access to instant cash, preparation for emergencies and above all security and peace of mind. And you get a great shirt!

Read the fine print: If you don't understand it, get someone to help
The offer above may sound like a great deal. You get a credit card in your name and a free shirt! Maybe you look at the application and notice that there is a lot of small print written in a way that is not familiar. You look quickly through it, sign the form and get the card, and the shirt. Here's a (fictional but realistic) example of what might you might have signed:

"Upon the issuance of my card, a $200 debit will be deposited into a new savings account established in my name and will serve as the security savings deposit for my $800 credit card. The $200 charge is considered a cash advance. A one-time enrollment fee will be imposed. A portion of this fee must be paid before my account is opened. Any portion of this fee not paid before the account is opened will be charged to the account.

I agree that once my application is received, the enrollment fee is not refundable. I agree that once a card is issued to me, all applicable fees shown below will be charged to my account and will not be refundable, even if I close my account before I use my card. If, for any reason, my application is denied, my money will be returned in full.

An Annual Membership Fee will be imposed on my account and will be billed in monthly installments. If my account is terminated before the full amount of the Annual Membership Fee has been paid, Platinum Splurge may bill the unpaid portion to my Account."

Fees and more fees
Maybe you got that far and thought it wasn't too bad; so far, other than the $200 security deposit, no other actual fee amounts have been mentioned. But the language gets a little more confusing about calculating finance charges and "average daily balances." And remember the compound interest: You will be charged interest on interest and fees and it will be added to your balance. Here is what you might end up paying in interest and fees.

Annual Percentage Rate: 19.80%
Enrollment fee: $99 but $135 if your credit report shows recent derogatory infomation
Annual Membership Fee: $72
Cash Advance Fee: $3 or 3%, whichever is greater
Other Fees: Replacement Card, $35; Late Payment, $25; Returned Payment, $25; Over the Limit, $25, Request for Sales Receipt, $6; Copy of Bill, $2; and this could go on.

Accounts and cards without interest
What about checking accounts and debit cards? Aren't they easier to manage? The answer of course is "it depends." Money in basic checking accounts usually does not earn interest, and many banks offer special student accounts that do not charge fees. Along with that account usually comes a debit or ATM card that allows you to take money out of your checking account any time at the ATM machine. If it is a debit card, you can use it like a credit card to make purchases in stores, but there are no interest charges involved.

What's the catch?
So far it sounds like everything is free, but there are some very important things to know once you have a checking account.

The ATM Machine: This is a quick and easy way to get cash out of your account, but pay attention to which machine you use. If it is not related to your bank in some way, you will likely be charged a fee to use it, and you will be charged twice! Your bank will charge $2, $3 or more and the bank or company that owns the ATM will charge you $2, $3 or more. Think about this: If you take out $10 and pay $4 in fees, you just paid 40 percent in fees TO GET YOUR OWN MONEY. Go the extra mile or so to get to your bank's ATM! If you go to certain places a lot, find out the nearest location of your bank's ATM. Don't spend your money on unnecessary fees.

ATM Cards vs. Debit Cards: As the name implies, an ATM card can only be used to get your money through ATM machines. A debit card can be used like a credit card to buy stuff at the grocery store or mall but the money immediately comes out of your checking account. Either of these cards is usually issued for free with a new checking account, but some banks may only offer ATM cards with student accounts. You may want to stick with that at first. Debit cards may be free, but they can be hard to manage and very very expensive if you're not careful how you use them.

With debit cards you have to be careful not only of the ATM fees, but of overdrawing your account. When you use the card, you have to have money in your accountat the very moment you use it. You can't charge something today, thinking that you will get paid tomorrow or the next day and the money will go back in to cover it. If that charge gets "posted" to your account before you get paid, and there is not enough money in your account to cover it, the bank may let you have the money but charge $40 or more for each time you overdraw your account. That means if you hit two or three stores, you will get charged the $40 two or three times.

At some banks, you can link your debit card to a savings account that can cover overdrafts, but this usually isn't a good idea unless you make regular deposits to your savings account. If you use your debit card a lot, you risk emptying not only your checking account but also your savings.

Other ATM/debit card fees: If you get either type of card, make sure you know whether your bank charges "per transaction" fees. That means that you could get charged each time you use the card, even if you use your own bank's ATM , although the fee is likely to be lower than the usual ATM fee. Most banks allow a certain number of free withdrawals each month before they start charging these fees. This type of fee may also apply to using the debit card in a store. Be sure to ask this question when you get the card.

Writing checks: If you don't get a debit card, you may need to write a check to buy something in a store or to pay a bill. Make sure you learn the best way to write one; ask your teacher or parent. Since checks take longer to process, you can sometimes write one today knowing the money will be there tomorrow, but do that only after you are sure you are managing your money well. You have to carefully track your spending to make sure you have enough in the account to cover all the checks on the date they are posted.

If you forget you wrote a check and then you check your balance at the ATM, it may show that you have more money than you do until that check gets posted, and you may spend the money that was supposed to cover that check. If there is not enough in the account to cover it, the bank may cover it and charge you a hefty overdraft fee, or it may simply return the check to the person you wrote it to and charge you a fee. If you wrote it to a store, that business also will charge a fee; it's usually $25 or more.

A few more things about debit cards: For a complicated reason (that you can research), if you use a debit card at a store, some banks may charge you a fee for using your PIN number to pay. They may prefer that you use it like a credit card and sign for the purchase. If you use your PIN, (and you must if you want cash back) you may be more likely to be charged a transaction fee.

There are several other issues with debit cards that can make them risky. These include

• the use of "blocking" or "holding" certain amounts on your card to assure you can pay for a transaction -- this is most likely to happen at a restaurant, gas station or hotel
• if it's stolen, it may be easy for someone to clean out your checking account
• if you use it on the Internet, you may not have a lot of protection from the bank if the item is damaged or undelivered.

Do some additional research on these topics to learn more about them. These are more reasons you need to learn to manage your money and your accounts.