One of the most overlooked relationships in your financial life is the one between you and your bank. Your bank(s) are where you will keep a large portion of your money, including your extremely important emergency savings funds. A good partner will help keep you protected from bank fraud and quickly resolve problems and will be there to provide home and auto loans. A good bank will direct you toward the right products and will even forgive the occasional mistake like an errant overdraft. The right bank will offer plus good interest rates and save you money.
However, all too often we hear stories about high ATM fees, banks taking months to resolve fraudulent spending, and a constant stream of fees ranging from overdraft fees to minimum balance fees. The wrong bank will offer little to no interest and will cost you money.
In this article we’ll review what account types you may look to have, what aspects of each of those accounts should have, what the red flags are, and will briefly touch on the options on bank type.
For most readers there are two basic account types – checking and savings accounts. The primary difference is that you are meant to spend money out of your checking account via checks, cards, wires, and online bill pay (with physical checks largely disappearing). Savings accounts, as the name implies are for saving, and usually you need to transfer money from savings to checking to spend it easily. Savings accounts carry a higher interest rate, so you get more from your money. Within each of these you will find many varieties, with starter accounts, premium accounts, and many other branded names. Within these you’ll often get slightly different benefits, but there is normally a tradeoff between a higher minimum balance and higher interest rates. Both are FDIC insured.
Our readers will also be familiar with Money Market Accounts (MMAs), which are kind of like a savings account, but usually have heavy restrictions on the number of withdrawals and minimum balances but offer much better interest rates. Money Market Accounts are FDIC insured while Money Market Funds are not.
CDs (Certificates of Deposit) offer the highest interest rates of these products, but they lock you in for a fixed length of time, and except with no-penalty CDs you risk losing all the interest should you need to withdraw any money from the CD. These are also FDIC insured.
Note, it is important that you bank is a member of the FDIC, which means that the US Government has insured your account up to $250k in the event that the bank loses your money (be it theft of mismanagement).
For a checking account, which all adults should have, the main thing is to look to minimize fees while maximizing interest. You should look at the following:
- What is the minimum balance to open and minimum balance to avoid monthly maintenance fees? Minimum balances for fee avoidance can be as high as $15-25k. This may not matter to some readers, but often you can find basic accounts that offer limited other perks with no minimum balances. Monthly fees can range from $0 to $25 at most banks.
- What is the interest rate? Your large banks like Bank of America, Chase, and Wells Fargo rarely offer more than 0.01% at present, while some smaller online-only banks offer 1% or more.
- Size of ATM network and out of network fees. Need to stop and grab $20 from the ATM but there isn’t one around? You can pay $2.50 for that privilege (a whopping 10%+ fee) to your bank, plus potentially fees to the ATM provider.
- Hopefully no one reading this will overdraft their account, but if so, you need to know the fees. $35 is common. And some banks are creative at stacking these on by using a large check to bust your account, and then 3-4 smaller checks to rack up 3-4 charges instead of doing it the other way and only penalizing you once.
In terms of perks you should always get online access, online bill pay, and a debit card with unlimited transactions. Many checking accounts no longer come with actual checks, but some still offer 100-500 checks, which can be important if you are dealing with companies that want a voided check. Wire transfer fees can be waived with some accounts or by some banks, so that can be another plus if you send money abroad regularly.
For savings accounts there are fewer options and few fees. Key things to look for are:
- Interest rate. The interest rate is one of the main features you’ll be looking for and in some of the better banks you’ll now get 2% or more.
- Minimum account fees can come in two forms with savings accounts. Some have minimum fees to collect interest and minimum fees to avoid penalties (maintenance fees).
In terms of benefits the ability to transfer your money for free and potentially access it via your debit card are key. In some banks having a savings and checking account means that you can get checking account fees eliminated.
For CDs the most important things are the interest rate and the ability to withdraw the funds without penalty.
The red flags with an accounts to watch out for are:
- High-monthly maintenance fees and/or minimum account balances. Fees will quickly erode the interest on even large balances, so it is important to make sure that you don’t pay for the privilege of letting banks make money from your cash.
- Mandatory direct deposits to avoid fees. This is a relatively new premise that some banks are going to, which they know will mean a deeper relationship with you.
- A cap on the number of free transactions per month. Some accounts limit you to 25 free transactions per month for checking, which can be hard to stay under if you use your card a lot.
- Small ATM networks. ATM fees can take several small bites out of your account, and there is nothing worse than being faced with losing money day-in and day-out with a small ATM network.
- Accounts at non-FDIC banks. Legally I’m not even sure if they are allowed to call them “accounts” these days, but you will see this. For example, some apps offer products that are like a checking or savings account, but are not FDIC insured. Never keep more than minimal amounts in these non-bank solutions.
Types of Banks
There are many different types of banks ranging from small credit unions to regional banks to the bulge bracket international banks. Below is a brief summary on types:
Credit Unions often offer a combination of great customer service and good interest rates, but are usually local. Furthermore, many have membership restrictions, meaning you can only join them if you meet a requirement like working for a certain company or having gone to a particular university.
Regional Banks often like to tout themselves as having all the benefits and the range of products that you get with large international banks, but with better customer service and an understanding of what is important to you. Their scale usually allows them to have a very good regional network of ATMs and branches, and usually better rates than their larger competitors.
The Bulge Bracket Banks, such as JP Morgan, Citi, Bank of America, Wells Fargo, and others are not only nationwide, but international and can handle a wide variety of circumstances. However, this comes with a trade off. They are often policy driven, and are not able to offer flexibility and can be tough with the fees, account minimums, and overdraft fees.
Online only banks are a new trend, but they are growing in popularity as their low-overheads from not having branches can mean higher interest rates. The concern is customer service as doing face-to-face meetings is next to impossible.
You need to find the right bank for you, and this means shopping around. Don’t be afraid to change from your current bank, but also don’t underestimate how hard this is – you’ll need to change your bill pay and automatic payments will need to be updated.
Remember, avoid fees and get the most out of your money with higher interest rates.
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