Fortunately, banks are required to give you a list of fees for their accounts. Even with interest, the best account is usually the one with the lowest fees.
Checking accounts are minefields for potential banking charges. Be sure you ask about monthly fees, fees for check processing, and ATM fees. A no-cost checking account may impose a charge if your balance drops below a minimum dollar amount. Check printing charges have sky-rocketed in recent years to as much as $24 at some banks. You can have your checks printed for much less by an outside financial printer.
It rarely makes sense anymore to park money in an old-fashioned “passbook” savings account. Monthly account fees may overshadow the small amount of interest you will earn. Put it in your checking account instead if you can refrain from spending it. If it’s a big enough sum, you might want to put it in a money market account. You will earn more interest than in a savings account, but make sure you don’t get hit with a monthly charge if your balance falls too low.
The accounts offered by depository institutions generally fall within one of these types:
Some checking accounts pay interest; others do not. A regular checking account -usually called a demand deposit account-does not pay interest, while a negotiable order of withdrawal (NOW) account-does.
Various fees are charged on checking accounts, in addition to the charge for the checks you order. Fees vary among institutions. Some charge a maintenance or flat monthly fee regardless of the balance in your account. Other institutions charge a monthly fee if the minimum balance in your account drops below a certain amount any day during the month or if the average balance for the month drops below the specified amount. Some charge a fee for every transaction, such as for each check you write or for each withdrawal you make at an ATM. Many institutions impose a combination of these fees.
Making withdrawals from an MMDA is less convenient than withdrawing from a checking account. You are limited to six transfers per month to another account or to other parties, and only three of these can be by check. Most institutions charge fees with MMDAs.
Many banks offer more than one type of savings account, for example, passbook savings and statement savings. With passbook savings you get a record book in which deposits and withdrawals are entered; this record book must be presented when making deposits and withdrawals. With statement savings, the bank mails you a regular statement showing withdrawals and deposits.
As with other accounts, various fees, such as minimum balance fees, may be charged on savings accounts.
Tip: Credit unions typically charge less for banking services than banks. Thus, if you have access to a credit union, it pays to use it.
Once you pick the term you want, you will generally have to keep your money in the account until the term ends. Some banks allow you to withdraw the interest earned while leaving your initial deposit (the principal) in the CD. Because you are leaving your funds with the bank for a set period of time, the rate of interest is generally higher than for savings or other accounts. Typically, the longer the term, the higher the annual percentage yield.
If you withdraw your principal before maturity, a penalty is usually charged. Penalties vary among institutions, and can be hefty-sometimes greater than the interest earned, eating into your principal.
The bank will notify you before the maturity date for most CDs. Often CDs renew automatically.
Tip: If you are going to take out your money at maturity, keep track of the maturity date and notify the institution that you wish to take out your money. Otherwise the CD will roll over for another term.
Tip: Compare basic and regular checking accounts, taking into account your check-writing needs, to get the best deal in low fees or low minimum balance requirements. If you don’t write many checks and don’t want to keep a minimum balance in the checking account, the basic account may be worth your while.
The answer depends on how you plan to use the account. If you want to build up your savings and you won’t need your money soon, a certificate of deposit will serve your purposes.
If you need to reach your money easily, however, a savings account may be a better choice. And if you want a way to pay bills, a checking account is probably best for you.
Tip: If you usually write only two or three checks per month, an MMDA might be a better deal than a checking account. MMDAs pay a higher rate of interest than checking accounts, but require a higher minimum balance.
Checking accounts have other advantages. They simplify your recordkeeping. Canceled checks provide you with receipts at tax time, and the check register is a convenient way of keeping track of monthly expenses.
Account features and fees vary from one institution to the next. It’s important to take the time to ask bank employees about any account features and fees before you open an account.
Tip: To get the most out of a checking account, find out what the minimum balance for avoiding fees is, and keep that minimum in the account. Further, try to get a checking account that will pay you interest, or that looks to the combined balance in checking and savings accounts to arrive at the minimum required balance. This way, you will not be paying the bank for the checking services, and your money will be earning some interest-although not at a great rate.
Choosing an account is a matter of comparing the features of accounts at various banks. The features that should be compared are:
Tip: Find out how the bank calculates the minimum balance requirement. A calculation that is based on the minimum daily balance is best for you.
Institutions may pay different rates tied to different balance amounts.
Example: An institution pays a 5 percent interest rate on balances up to $5,000 and 5.5 percent on balances above $5,000. If you deposit $8,000, the institution that pays interest on the entire balance pays you 5.5 percent on the entire $8,000. Other institutions may pay you 5 percent on the first $5,000 and 5.5 percent only on the remaining $3,000.
Tip: To tell which method an institution uses, check the annual percentage yield (APY) disclosure. If it is a single figure for a balance level, you will be paid the stated interest rate for the entire balance. If the APY is stated as a range for each balance level, your earnings will depend on the balance you keep in each level. Of course, getting paid the stated interest rate on the entire balance is a better deal.
Tip: You can cut ATM fees by limiting yourself to only one withdrawal per week, or by using only ATMs owned by your bank.
Tip: You can save up to 50 percent on the cost of checks by ordering your checks from your own supplier, instead of letting the bank order them.
If you are looking into a CD, here are some questions to ask:
Federal deposit insurance sets apart deposit accounts from other savings choices. Only deposit accounts at federally insured depository institutions are protected by federal deposit insurance. Generally, the government protects the money you have on deposit to a limit of $100,000. Accounts for special relationships, such as trusts or co-owners, may also have some effect on the amount of insurance coverage you have.
Tip: Ask the bank how the deposit insurance rules will apply to your deposit account. Federally insured depository institutions also offer products that are not protected by insurance. For example, you may purchase shares in a mutual fund or an annuity. These investments are not protected by the federal government.
Here are some tips for negotiating with your current bank to try to get a better deal on your checking account.
Tip: Many banks offer free checking to seniors, students, or the disabled, if the depositor asks for this service.
Tip: If you decide to take your business elsewhere, don’t overlook smaller banks, which may be more eager for your business.
What questions should I ask when shopping for a Checking Account?
You need to know exactly how much a checking account will cost you. Get a list from your banker of all possible fees, including charges for maintaining the account, processing checks, bouncing checks, using the ATM, stopping payment, and transferring funds. Ask if the account will be cheaper if the bank does not return canceled checks. In the rare event that you need one, ask how much, if anything, it will cost to get a copy. To avoid bouncing checks, ask how long you have to wait after depositing funds to draw on them.
For interest checking accounts, ask how the bank calculates the interest. If the bank pays more on accounts with higher balances, be sure you get a “tiered” rate, which pays you the highest interest on all the money you have in the account. Be sure you know the charge for falling below the minimum balance, too. It might be more than the interest you will earn. Finally, some banks reduce charges on checking accounts if you take out a loan or buy a CD. Ask what deals are available.
Many people overlook a valuable service offered by banks: the overdraft protection line of credit. With this protection, if you write a check which would overdraw your account a loan is automatically made from a line of credit. With this protection you will not bounce any checks.
This type of service is most valuable to a self-employed individual whose business is seasonal. If there are times during the year when you have cash flow problems, the overdraft protection line of credit can save you headaches-and at a lower interest rate than other forms of borrowing.
Starting in 2010, automatic overdraft protection is no longer provided by banks and bank customers must opt-in for this protection. Don’t neglect to inquire about this service if it would suit your situation.
The Truth in Savings Act, a federal law, requires depository institutions to disclose to you the important terms of their consumer deposit accounts. Institutions must tell you:
To help you shop for the best accounts, an institution must give you information about any consumer deposit account the institution offers, if you ask for it. You will also get disclosures before you actually open an account.
In addition, the Truth in Savings Act generally requires that interest and fee information be provided on any periodic statements sent to you. And if you have a roll-over CD that is longer than one month, the law requires also that you get a renewal notice before the CD matures.