Checking Accounts, A complete reference

Everything you really need to know about checking accounts.

In this article:

• Why start with checking account?
• What should you look for in a checking account?
• Various types of fees associated with your checking accounts and how to avoid them.
• How many checking accounts should you have?
• Some additional tips.

Why start with checking account?

Selecting is good checking account is good way to start organizing your personal finance and to set the stage for better things in your personal finance.  (Which I will continue to help you with )

What should you look for in a checking account? How to select the best checking account?

Things you should consider are:

1. Does the checking account have any monthly fee?

It is crazy how many people are actually paying these fees. Almost all banks have ‘No-Fee’ checking accounts available if you maintain a minimum balance or do a direct deposit (or even without any of these requirements, see Some Additional Tips section). If you are on a payroll it should be easy for you to set up your direct deposit through your employer. If you are a student then many bank offer free student checking account without any requirements. Even if you are a part-time student, try investigating about this option.

2. Interest rate.

For long I was under the impression that checking accounts do not pay any interest (or a negligible rate of interest, at best). However after some looking around I found some high yield checking account and the interest rates were pretty high. They generally have some additional requirements but they can be easily satisfied and they pay anywhere from 3-5% interest rate. To find a checking account that pays high interest you can use a website like CheckingFinder or a list like this. This single piece of information can be a game changer for your passive savings and your emergency fund savings. This is also one of the reasons I stick my emergency fund in a checking account over a CD.

3. Accessibility and Convenience.

Things like, how convenient it is for you to go to the bank (if you have to)? Do they have online banking (nearly all banks have online banking these days and it makes sense to use it to cut down your visits to the bank).

4. Debit Cards.

Debit cards that are Visa, MasterCard or Amex can really come in handy at times. They will be accepted anywhere credit cards are accepted. Make sure your bank issues one of these to you. Some banks also have cash backs and rewards associated with debit card.

5. Personal relationships and community.

Banking with people in your community is great way to help your community. Consider local credit unions, they are easy to deal with and they play a role in the development of the locality. You can locate a credit union in your area using one of these two services,  Credit Union and Find a Credit Union.

6. Special rates.

Some banks offer lower rates on loans and higher rates on CDs to their checking account customers. I would suggest that you some research here and open a checking account with the bank if it helps you get a better rate just before making a large CD or getting a loan from that bank. Banks like Chase will take of up to 0.25% of your mortgage interest rate which can be substantial savings.

7. Security of your Money.

Is the bank FIDC or (NCUA) insured? Is the bank location physically in a safe area?

Various types of fees associated with your checking accounts and how to avoid them.

There are various fees a bank charges in association with a checking account. Some of these are:

a. Monthly account fee.

b. Overdraft fees: When you try to withdraw (or write a check for) more money than you actually have in your checking account banks will charge you a fee, unless you have an over draft protection plan. These can be exorbitant.  Some banks are really cruel when it comes to this fee. I read an article where a person was charged an over draft fee for a debit card transaction and then another over draft fee as the original over draft fee could not be paid…! (Thankfully it did not continue recursively).

c. Over draft protection fee: Some bank will scare you with the huge over draft fee and then tempt you in to paying a couple of dollars per month to avoid any over draft fees. Avoid accounts with such plans, there are many banks that offer over draft protection as a line of credit or will link it to the cash advance on your credit card.

d. Check writing fees: I have never encountered a checking account which actually charges this fee but I have seen some claim that they do not, this make me wonder that there might actually some banks that charge this fee (or it may just be a marketing gimmick..!)

e. Fees for check books: Some accounts come with unlimited check books, so no worries for them. While I would suggest that you perform most of your transaction electronically; so you would not need so many checks in the first place but not having to pay for a checkbook when you need one cannot hurt. If you do have to buy a checkbook then compare your bank rates with other online services, on average the later should be cheaper than the former. Do not spend money on buying fancy checks they are simply not worth it.

f. Bounced check fee: If you happen to deposit a check that does not clear for some reason, the bank may charge you a fee. It’s a double whammy.

g. (Out of network)ATM fee: When you use an ATM that is outside the network of your bank (generally your bank and any associated subsidiaries) you may be subject to two fees:

i.  The ATM machine provider charges you for using their machine.

ii.  Your bank may charge you for using an ATM out of their network.

h. Block check fee:  If you happen to write a check and loose it or if you have already given it out to someone and later decide that you do not want them to use it, you can ask your bank to block the check (i.e. only before the check has already cleared…!). The bank will also charge you a fee for this.

Banks are very creative with these fees and they actually make a lot of money by charging these fees.

How to avoid these fees?

Most of this is pretty obvious and just knowing about these fees will make you try to avoid them. So read about these fees or ask your banker about them.

The minimum balance requirement may be computed in different ways by different banks, some require a daily minimum balance and some require an average minimum balance over the month. If you do not know what the requirement on your account is; call you bank to find out…! Or you may assume it is a daily minimum balance, that way you are covered for both the cases. If you have to maintain a daily minimum balance, keep some more money in your checking account than the required minimum balance to allow some transaction to go through without actually going below your required balance.

How many checking accounts should you have?

This depends on your personal situation and how many accounts you wish to mange. Most of us should be fine with 1-2 accounts. I would suggest having two checking accounts, one with a high interest rate (even if the account is not very easily accessible) and one which is easily accessible (even if does not have high interest).

Some additional tips.

1. Never have more balance in your checking account than what is protected by FDIC coverage. Bankruptcies of bank come as a surprise and it may just catch you at the wrong time. If you do happen to have so much in cash consider splitting them in to accounts in various institutions so you are still under the limit.

2. If you are a married, then at least have one joint account and one independent account. Merging your finances can be a long process; a joint checking account will be a good start. Even if you have decided not to merge your finances completely, it is still easier to have one for common transactions. An independent one can come in handy when you want to plan that surprise vacation for your partner and do not want them to become aware of it when they see the statement.

3. Checking account is great place to store some portion of your Emergency fund. However if you have a checking account that pays low interest rate (consider moving to a high yield checking account) do not put a lot of money in it as you will lose some valuable interest, instead keep the money in high yield savings account.

4. Some banks (like Bank of America) offer free checking accounts without direct deposit if you open them online. If you cannot satisfy the requirement for direct deposit or minimum balance then open such an account.

5. Many banks let you set alerts on your account in case of a withdrawal/deposit above a certain limit. This feature can be used as tool to enhance security and identify unauthorized transactions as soon as they occur.

6. Always look at your monthly statements to identify if the bank is charging you any fees or if there any unidentifiable expenses.

7. Getting all the factors right in a bank can be difficult, so get an account that fits most of your needs rather than trying to get the best and holding on to a really crappy checking account.

PS: This article was featured in the Carnival of personal finance #211.

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