CHAPTER
2

Choosing the Right Bank Accounts

In This Chapter

• Shopping around for the best bank bargains
• Comparing banks and credit unions
• Taking advantage of online banking
• Balancing interest rates with bank fees
• Cutting ATM costs

If you’ve been on your own for any length of time, either at college or living on your own and working, you’ve probably had some association with a bank or credit union. It used to be that people chose their bank based mostly on convenience and availability. Plenty of automated teller machines (ATMs) or branch offices made it easy to take care of business and made a bank attractive to prospective customers, even those who do most of their banking online.

Surveys show that these days, however, younger clients are being more discerning about choosing banks. They’re passing by the big regional and national banks and looking for local institutions they believe will be more attentive to their needs, charge lower fees for services, and offer plenty of access to ATMs.

Professional services company Accenture PLC reported that in 2014, community banks saw a 5 percent increase in customers ages 18 to 34, while big regional and national banks lost 16 percent of customers in the same age group. Business at credit unions increased by 3 percent.

The fact that younger customers are studying their options and being deliberate when choosing banks is good news. Let’s review what customers are looking for and how banking institutions differ.

Do You Have the Accounts You Need?

Chances are pretty good you already have savings and checking accounts. You’ve probably been keeping some money in a checking account to pay for things such as books, rent, the cable bill, your car payment, and any other bills that come along. Money in checking accounts used to be accessed by paper checks, but they’ve mostly been replaced by debit cards and credit cards.

It’s possible you’ve managed to get through life so far without checking and savings accounts. If that’s the case, it’s time to get them established. If you already have these accounts, take a good look at them to see if you’re getting the best deal you can.

Checking Accounts

The concept of a checking account is simple. You keep money in an account and use a debit card, or write a check, to access money from the account instead of paying with cash. This eliminates the need to carry large amounts of cash or send cash through the mail to pay bills in the event you aren’t set up for online payments.

Finding a checking account that makes sense for you isn’t quite as easy as getting on a bank’s website and filling out a form or two. You’ll need to do some research to ensure you get an account that won’t charge a lot of fees yet offers the most advantages. Remember, banks are competing for customers, so they’re willing to offer some perks to get your business. Don’t forget, however, to look at the flip side and consider all the fees and conditions you’ll have to pay when you open an account.

In today’s competitive banking environment, you can find a checking account that doesn’t come with monthly maintenance fees and surcharges. That’s more likely to happen if you’re willing to go with a community bank or credit union instead of a major bank.

If you’re sold on big banks and not willing to change, be prepared to pay a fee, as only 38 percent of checking accounts at larger banks are free, according to Bankrate. However, 72 percent of credit unions offer free checking, and many smaller banks and credit unions even offer rewards checking accounts if you meet certain conditions.

To get those rewards, you might have to agree to use your debit card a certain number of times a month or have your paycheck directly deposited into your account. Or you might have to agree to online banking or maintaining a minimum balance.

In exchange, many banks offer interest on checking accounts or rewards such as free overdraft protection, travel miles, or a small rebate on your debit purchases.

Although these are conditions that might be daunting to older customers, most millennials already do direct deposit, bank online, and use their debit cards. So be sure to look for free checking, and compare the perks that might accompany it.

While you’re looking for free checking or a rewards programs, however, also remember to check into any fees associated with the account. Even if you’re not being charged any monthly maintenance fees, you still could be looking at fees for ATM transactions, overdrafts, and so forth.

Here are some common checking account fees to be aware of:

• Minimum balance fees If you’re sure you can maintain the required balance, this isn’t a problem. If you have doubts, keep looking.
• ATM fees More about these in a bit, but if you’re a frequent ATM user and your bank is an ATM wasteland, think about a change.
• Overdraft charges These can be killers, so be sure to keep track of what you have and what you spend. Download a budgeting app, or see if your bank offers an automatic alert when your balance falls below a certain level to avoid incurring this charge.
• Lost card fees If your debit card is lost or stolen, you’ll likely be charged for a new one.
• Hard-copy statement fees This probably isn’t an issue, but if for some reason your statements aren’t available online, you could be charged for the printouts.
• Account closing fees Your bank wants to keep your business and may charge you if you close your account. Ask about this when you’re considering opening an account.
• Foreign transaction charges If you travel abroad frequently, be sure to talk to someone at your bank about these fees and how you can minimize them.

If you’re just getting a checking account set up or are looking to find a new bank, be sure to get a complete listing of all account fees and regulations, and take the time to read it carefully. Compare the information with that from other institutions, too, because there may be significant differences. If you come across rules you don’t understand, ask someone to explain them to you. Also inquire about fees, minimum balances, interest rates, overdraft protection, and anything else you can think of that might be helpful to know.

After you’ve opened a checking account, or changed your account to a bank that offers a better deal, there are a few other things to keep in mind.

One simple but important rule is to keep your checkbook and debit card in a safe place and report the loss or theft of either immediately. Federal law limits liability for a lost or stolen bank debit card if you report the loss to your bank or credit union within 2 days. If you do that, the most fraudulent charges you can be responsible for is $50. If you don’t report the lost card within 2 days of it going missing, you’ll be liable for $500 of fraudulent charges. And if you really slack off and don’t report the loss for more than 60 days after you get your next statement, you’re responsible for all charges.

You also must keep track of how much money you have in your account to avoid overdraft fees. At the beginning of 2016, the average overdraft fee was $34. A couple of those fees a month can take a big chunk out of a paycheck.

An easy way to avoid these fees is to download your bank’s mobile app. The app allows you to log in to your account from anywhere, so you can check your account balance, transfer funds, track transactions, and keep an eye out for suspicious activity wherever you are.

If your bank doesn’t offer a mobile app, check out some of the free apps you can download such as these:

• Balance (cwakamo.com/balance)
• Mint (mint.com)
• Checkbook (appxy.com/checkbook)

If you write checks, be sure to keep a record of the check number, amount, and to whom it was written. This is important in the event your landlord claims he didn’t receive your rent payment, for example.

Also, always review your statement each month and confirm all deposits, ATM transactions, and withdrawals. If you notice something that doesn’t look right, call your bank right away. Banks do make mistakes, and they’re not always in your favor.

When deciding on the checking account that’s best for you, ask yourself some questions:

• Will my paycheck be deposited directly into my checking account?
• How will I keep track of my transactions and balances?
• Will I be writing any checks or paying all my bills online?
• Do I want to know that I can walk into a branch and ask someone for help, or will I handle my checking account online?

Savings Accounts

Many of the same points covered in the “Checking Accounts” section apply when you’re looking to open a savings account, too. You need to figure out your savings habits and find a bank that offers a deal that will best suit you.

Most banks charge a monthly or quarterly maintenance fee unless you meet certain criteria, and some might tack on an additional fee if your balance falls below a required minimum. In addition, you might be required to keep a savings account active for a specified time or face penalties.

When you’re looking for a place to set up your account, review the list of questions suggested in the earlier “Checking Accounts” section, and ask if those apply to savings accounts, too.

You also need to ask a few other questions specifically geared toward savings accounts:

• Does the bank use a tiered account system?
• Will I be penalized if I close the account before a certain time?
• Is the account federally insured?
• How much interest will I get on my savings?

Back in the day, banks were required to pay 5 percent interest on savings accounts—something practically unthinkable today. That required interest ended with banking deregulation in 1986. At the beginning of 2016, the national average for interest banks pay on savings accounts is 0.26 percent, according to MyBankTracker, an independent resource that lets consumers compare banks.

That being said, however, it pays to shop around because the amount of interest varies significantly from bank to bank. Some banks were offering 0.01 percent interest on savings in February 2016, but others came in as high as 1 percent with no minimum deposit. Check out MyBankTracker (mybanktracker.com) for a comparison of rates.

Money Market Accounts

Money market accounts (MMAs), a type of savings account, generally pay higher interest than regular savings accounts. You can write a minimum number of checks (usually three) on the account each month. As with checking accounts, some online banks are offering relatively high interest rates on MMAs.

If you write only a couple checks a month, a money market account might be worth considering. But there’s usually a hefty fee if you write more than the number of checks permitted, and the bank may require a higher minimum balance than with a savings account. Any additional interest is quickly chewed up if you have to pay for extra checks or a low-balance fee. You learn more about these accounts in Chapter 13

Certificates of Deposit

If your savings account balance becomes substantial—that is, if it contains more money than you think you’ll need anytime really soon—consider putting some of it in a certificate of deposit (CD). With a CD, you deposit money for a specified amount of time, usually from 3 months to a number of years. The longer you leave your money in the account, the more interest you should get on it.

Interest rates on CDs generally are higher than those on savings and money market accounts, but there’s usually a penalty if you need to get the money out of the account before the agreed-upon time.

Although variable (changeable) rate CDs are available, CD rates are usually set for the term of the certificate, unlike money market rates, which are changeable at any time. More information about CDs is included in Chapter 13.

All Banks Are Not Created Equal

Take a look around your local area sometime, and notice the difference in the brick-and-mortar financial institutions. You’ll probably find quite a few, ranging in size from something as large as the Bank of America to a small local bank or credit union. And then there are online banks, which provide services exclusively via the internet.

Traditionally, there were three types of financial institutions:

• Banks
• Credit unions
• Thrifts, or savings and loans

Let’s take a quick look at the similarities and differences of these.

Commercial Banks

Also known as full-service banks, commercial banks are the most widely used financial institutions in the United States, with about 5,440 in operation. There used to be a lot more commercial banks, but for a variety of reasons—including mergers, failures, and a steep decline in the number of new banks—the number has dropped significantly.

Commercial banks are permitted to take deposits, loan money, and provide other banking services. They can have either a federal or state charter and are regulated accordingly.

The size of commercial banks varies greatly, from huge mega-banks to small community banks.

Credit Unions

With more than 100 million members, credit unions have been growing in popularity in recent years. They offer many of the same services as commercial banks—checking accounts, savings accounts, vacation clubs, ATM services, mobile apps, and online banking. Credit unions generally can offer better rates on loans and savings because as not-for-profit organizations, they don’t pay federal taxes.

It used to be that only people with a common occupation, association, or geographical area could form and join credit unions. These days, however, practically everyone can join a credit union in one capacity or another.

Before joining a credit union, be sure it’s federally insured. Federally insured credit unions are insured by the National Credit Union Share Insurance Fund, which is backed by U.S. government. Those that are not federally insured may not have government backing.

Thrifts

Thrifts are the financial institutions commonly known as savings and loans (S&Ls). S&Ls took a hit in the late 1980s, when many of them failed and had to be bailed out by Uncle Sam (that is, taxpayer dollars). Legislative changes that followed improved the quality of thrifts, making them good options for depositors once again.

S&Ls were developed for the purpose of providing loans to residential customers, meaning their business line is designed to meet the needs of local customers. A relatively small number of S&Ls still operate, as their numbers have greatly declined, but today they’re run pretty much like any other bank.

Regardless of the type of institution you choose, be sure to do your homework. Look into its history, and check its financial soundness by using Bankrate’s “Safe and Sound” calculator at bankrate.com/rates/safe-sound/bank-ratings-search.aspx.

If you ever get into a situation in which you believe your bank has treated you unfairly or is not conducting business properly, you can contact the Federal Reserve System’s Consumer Help site. Find out more at federalreserveconsumerhelp.gov.

Technology makes it possible—and very easy—to make deposits, pay bills, transfer money from one account (or person) to another, and perform other tasks, and fewer people are venturing out to visit their banks. Banking analysts predict this will mean fewer bank branches in the future, and those that remain will be smaller with fewer tellers.

Today, most people conduct at least some of their banking online—paying bills, transferring money, depositing checks, taking care of other tasks, etc.—with a computer, tablet, or smartphone.

Using your bank’s mobile app to bank online, however, is not the same as being a customer of an online bank.

Online banks, nearly all of which are backed by the Federal Deposit Insurance Corporation (FDIC), operate exclusively via the internet. No brick-and-mortar branches exist.

If your bank is an online bank, you can’t swing through the drive-thru to pick up some cash or stop by a branch to ask the teller a question or sign a form. And not having to maintain that drive-thru or lobby, or pay a lot of tellers to help you with that question or form, saves online banks a serious amount of money.

Because of that, online banks can afford to pay higher interest rates to their customers, and that makes them very appealing. It’s not unusual for online banks to pay upward of 1 percent interest on savings accounts, which is far better than many traditional banks can offer.

Lower costs for the banks also can translate into lower fees for you—another benefit. And most online banks offer free ATM use and other perks. In addition, you don’t have to think about waiting in line at a branch, shuffling through paper statements, or having your branch close for the day before you can deposit your check.

Here are some highly rated online banks for 2016:

• Ally Bank (ally.com)
• Nationwide Bank (nationwide.com)
• Discover Bank (discover.com)
• Connexus Credit Union (connexuscu.org)
• First Internet Bank of Indiana (firstib.com)

No matter how you decide to conduct your banking, interest rates probably will be a factor in deciding what financial institution you choose. These days, interest rates are pretty much low across the board, although you’ll probably find higher rates with a virtual bank. Still, you should look around and see where you can get the most interest on your money. Even a fraction of a percentage point adds up over time. And as you get more money, it makes even more of a difference.

The Consumer Financial Protection Bureau (CFPB) has taken banks to task for overdraft and other fees, but it doesn’t appear that banks will be backing down.

ATM Fees

ATM fees are another big source of revenues for banks. Every time you use an ATM that isn’t part of your bank’s network, you pay an average fee of $4.35. Part of that fee goes to your bank, and part goes to the owner of the ATM.

ATMs were first introduced in the late 1960s and became increasingly popular over the decades that followed. Today, you can find them anywhere you might need some cash: restaurants, bars, coffee shops, department stores, movie theaters, gas stations, etc.

As convenient as ATMs can be, they can be expensive. Some cynics have stated that, considering the fees levied at cash machines, ATM should not stand for “automated teller machine,” but “automated theft machine.” Think about it. If you use an out-of-network ATM twice a week at even $4 a transaction, in a year, you will have paid more than $200 just to access your own money.

You can minimize or avoid those high fees in several ways. MyBankTracker’s (mybanktracker.com) mobile app can help you locate in-network ATMs wherever you are. You also can get cash back in many retail stores, as well as at most U.S. Post Office branches.

If you have to withdraw money at an ATM, think ahead and get enough so you won’t be back in a day or two. It doesn’t make sense to pay $4 to get $30 out of your checking account. Also limit your visits to the ATM to avoid excessive fees.

Or consider opening a no-ATM-fee checking account at an online bank such as Schwab Bank (schwab.com) or Ally Bank (ally.com). Both offer free checking accounts with unlimited ATM fee reimbursements. Opening one of these accounts doesn’t mean you have to give up your current checking account. You can use the no-ATM-fee account when an in-network ATM is not available.

The best thing to do concerning fees is to go to your bank and get a copy of its fee disclosure statement. If you’re a customer at an online bank, you should be able to find an explanation of all fees online. Look it over carefully, and see how many of the fees apply to you. If it seems like too many, you might want to think about finding a new bank.