Brick-and-mortar banks

The most obvious choice for banking is using a local bank you pass by on a regular basis. Although these types of banks are conveniently located, these banks may not be the most cost efficient. You can find two main types of brick-and-mortar banks:

• Small-town bank: These banks only have a handful of branches. Some of the tellers may even remember your name and face. Hours are generally limited, and you may face extra ATM fees for using ATMs that aren’t at one of the bank’s branches.

  A sometimes attractive, “small-town” banking option is credit unions. To join, you generally need to work for a particular employer (such as General Electric) or industry/occupation (for example, teachers). Thanks to a federal government exemption on income taxes, credit unions tend to be able to pay higher interest rates on deposits and charge lower rates on loans. Don’t assume, however, that a local credit union always has the best deals; be sure to comparison shop. To locate credit unions near you, visit the Credit Union National Association website for consumers at www.asmarterchoice.org and click on the “Find a Credit Union” link or call them at 800-356-9655.

• Big banks: Such banks tend to be regional, national, and sometimes even multinational. You may recognize their name from extensive advertising campaigns. They tend to have extensive ATM networks, which may reduce your ATM fees, but you pay for it in other ways, such as through less-competitive terms (interest rate paid, service fees levied) on checking and savings accounts.

Later in this chapter, in the “Banking Online” section, I identify some universal questions you can ask when searching for a bank, no matter which kind of bank you use.

Be sure to comparison shop among several banks and scrutinize their fees and interest rates on their checking accounts and any other type of account you may be interested in. Also, read the “Understanding Your Bank Account Options” section later in this chapter, and read the rest of the chapter so you’re aware of your nonbank and Internet banking options.

Online banks

Although traditional banks with walk-in branch locations are shrinking in number because of closures, consolidations, and some failures, online banking is growing — and for good reason. One of the biggest expenses of operating a traditional retail bank is the cost of the real estate and the related costs of the branch.

Online banks generally don’t have any or many retail branches and conduct their business mostly over the Internet and through the mail. By lowering their costs of doing business, the best online banks may offer better account terms, such as paying you higher interest rates on your account balances. Online banks can also offer better terms on loans.

Online banking is convenient, too — you can conduct most transactions more quickly on the Internet, and by banking online, you save the bank money, which enables the bank to offer you better account terms. And because online banking is generally available 24/7, you don’t need to rush out at lunchtime to make it to your bank during its limited open hours. (Note: Traditional brick-and-mortar banks now generally offer many online services.)

According to a recent customer ratings’ summary done by Consumer Reports, the highest-rated online banks are (in order, starting with the highest rated): USAA, Schwab Bank, Everbank, Discover Bank, Ally Bank, State Farm Bank, Capital One 360, and E-Trade Bank.

Other choices

You can also place your money in a brokerage account or money market fund. If you want to consider other options that offer more attractive investment accounts and options, check out the later section “Considering Your Alternatives.”

Transaction accounts

Whether it’s paying monthly bills or having something in your wallet to make purchases with at retail stores, everyone needs the ability to conduct transactions. Two of the most common types of transaction accounts are checking accounts and credit cards.

Options for getting cash

You need a firm understanding of the different features of the transaction accounts your bank offers so you can easily access your cash. You may think choosing a bank that has a large ATM network is your best option, but think again.

One reason that bank customers have gotten lousy terms on their accounts is that they gravitate toward larger banks and their extensive ATM networks so they can easily get cash when they need it. These ATM networks (and the often-associated bank branches) are costly for banks to maintain. So, you pay higher fees and get lower yields when you’re the customer of a bank with a large ATM network — especially a bank that does tons of advertising.

Do you really need to carry a lot of cash and have access to a large ATM network? Probably not. A debit card is likely the better option for most people since these cards are so widely accepted by retailers and other product and service sellers.

Savings accounts

Savings accounts are accounts for holding spare cash in order to earn some interest. Banks and credit unions generally pay higher interest rates on savings account balances than they do on checking account balances. But savings account interest rates have often lagged behind the rates of the best money market funds offered by mutual fund companies and brokerage firms. Online banking is changing that dynamic, however, and now the best banks and credit unions offer competitive rates on savings accounts.

The virtue of most savings accounts is that you can earn some interest yet have penalty-free access to your money. The investment doesn’t fluctuate in value the way a bond does, and you don’t have early-withdrawal penalties as you do with a certificate of deposit (CD).

Evaluating a bank: What to look for

When looking for a bank that fits your needs, put on your detective hat and get ready to search for the best deals. You don’t want to pick a bank just because that’s where your parents or a co-worker bank.

So what do you look for? You first want to look for a bank that participates in the U.S. government–operated Federal Deposit Insurance Corporation (FDIC) program. Otherwise, if the bank fails, your money isn’t protected. The FDIC covers your deposits at each bank up to a cool quarter million dollars.

Some online banks are able to offer higher interest rates because they’re based overseas and, therefore, don’t participate in the FDIC program. (Banks must pay insurance premiums into the FDIC fund, which, of course, adds to a bank’s costs.) Another risk for you is noncovered banks that take excessive risks with their business to be able to pay depositors higher interest rates.

When considering doing business with an online bank or a smaller bank you haven’t heard of, you should be especially careful to ensure that the bank is covered under the FDIC. And don’t simply accept the bank’s word for it or the bank’s display of the FDIC logo in its offices or on its website.

Check the FDIC’s website database of FDIC-insured institutions to see whether the bank you’re considering doing business with is covered. Search by going to the FDIC’s “BankFind” page (research.fdic.gov/bankfind). You can search by the bank’s name, city, state, or zip code. For insured banks, you can see the date it became insured, its insurance certificate number, the main office location for the bank (and branches), its primary government regulator, and other links to detailed information about the bank. In the event that your bank doesn’t appear on the FDIC list yet the bank claims FDIC coverage, contact the FDIC at 877-275-3342.

In addition to ensuring that a bank is covered by the FDIC, also seek answers to these questions:

• What’s the bank’s reputation for its services? This may not be easy to discern, but at a minimum, you should conduct an Internet search of the bank’s name along with the word “complaints” or “problems” and examine the results.
• How accessible and knowledgeable are customer-service people at the bank? You want to be able to talk to a live, helpful person when you need help. Look for a phone number on the bank’s website and call it to see how difficult reaching a live person is. Ask the customer-service representatives questions to determine how knowledgeable and service oriented they are.
• What are the process and options for withdrawing your money? This issue is important to discuss with the bank’s customer-service people because you want convenient, low-cost access to your money. For example, if a bank lacks ATMs, what does it charge you for using other ATMs?
• What are the fees for particular services? You can probably find this information on the bank’s website in a section called “accounts terms” or “disclosures.” Also, look for the Truth in Savings Disclosure, which answers relevant account questions in a standardized format. Figure 11-1 shows an example of a bank’s disclosure for its savings account.

Protecting yourself online

The attractions of banking online are pretty obvious. For starters, banking on your computer whenever you want can be enormously convenient. You don’t have to race around during your lunch break to find a local bank branch. And thanks to their lower overhead, the best online banks are generally able to offer competitive interest rates and account terms to their customers. Even if you go with a brick-and-mortar bank, you can usually also bank online.

You probably know from experience that conducting any type of transaction online is safe as long as you use some common sense and know who you’re doing business with before you go forward. That said, others who’ve gone before you have gotten ripped off, so you do need to protect yourself.

Folks have been taken online to the tune of more than one billion dollars a year, according to the Internet Crime Complaint Center (ICCC), which is a joint government effort between the Federal Bureau of Investigation and the National White Collar Crime Center.

ICCC and other online security experts recommend that you take the following steps to protect yourself and your identity when conducting business online:

• Never access your bank accounts from a shared computer or on a shared network, such as the free access networks offered in hotel rooms and in other public or business facilities.
• Make certain that your computer has antivirus and firewall software that’s periodically updated to keep up with the latest threats.
• Be aware of missed statements that could indicate your account has been taken over.
• Report unauthorized transactions to your bank or credit-card company as soon as possible; otherwise, your bank may not stand behind the loss of funds.
• Use a complicated and unique password (including both letters and numbers) for your online bank account.
• Be careful about the sites you visit. Sites purporting to offer free-access music, games, and movies are often sources of viruses and trojans that fraudsters use to steal your account information.
• Watch out for phishers, people posing to be your bank or bank’s representative. If “they” are contacting you, especially through email, it’s likely to be fraud. Never follow a bank link directly from an email; always visit the bank website directly by typing in the URL.
• Log out immediately after completing your transactions on financial websites.

Brokerage accounts with check writing

Brokerage firms enable you to buy and sell stocks, bonds, and other securities. Charles Schwab, Scottrade, E*Trade, TD Ameritrade, and Fidelity are among the larger brokerage firms or investment companies with substantial brokerage operations you may have read or heard about. (See Chapter 12 for my specific recommendations of firms that I like.)

Some of these firms have fairly extensive branch office networks and others don’t. But those that have a reasonable number of branch offices have been able to keep a competitive position because of their extensive customer and asset base and because they aren’t burdened by banking regulations (because they aren’t banks) and the costs associated with operating as a bank.

A type of account worth checking out at brokerage firms is an asset management account, also referred to as a cash management account. Although the best deals on such accounts at some firms are only available to higher-balance investors, the best of these accounts typically enable you to

• Hold and invest in various investments (stocks, bonds, mutual funds, and so on) in a single account
• Write checks against a money market balance that pays competitive yields
• Use a Visa or MasterCard debit card for transactions

Money market funds

Basically, a money market fund is very similar to a bank savings account except that mutual fund companies offer them, which means they lack FDIC coverage. Historically, this hasn’t been a problem, because retail money funds have lost shareholder principal only in one case (the Reserve Primary fund lost less than 1 percent of investors’ money).

The attraction of money market funds is that the best ones pay higher yields than bank savings accounts and also come in tax-free versions, which is good for higher-tax-bracket investors. I explain money market funds in greater detail in Chapter 12.