The Free Checking Account Myth
One of the biggest myths of the financial industry is the "free" checking account. They have high minimum balance requirements, offer 0% interest, and have other annoying requirements. The worst part is that they're not even free.
If you kept $5,000 at a free checking account earning 0% interest, you're giving up $100 in annual interest that you would've received at a bank offering 2% (that's the yield you could expect from a high yield savings account). The bank may not be charging you a fee, so it's technically "free," but they're not giving you your due.
What's the solution? Find an online bank that offers both a checking and savings account option. ING Direct is one bank that offers both. By having the two at a single bank, you can keep your money in a savings account and transfer it to the checking account only when needed, maximizing your interest.
I would continue to keep your regular brick and mortar free checking account so you can easily deposit checks at the branch. As soon as the checks clear, you can transfer them to the online bank to maximize interest. Online banks let you mail in checks but I always prefer to deposit it into an ATM or to give it to a teller.
It may seem like a lot of additional headache for a minimal gain, and that's accurate, but who can't use a little extra nowadays? I'd rather have the hundred bucks in my pocket than in the bank's income statement.
Jim writes about personal finance at Bargaineering.com.
(Photo: armydre2008)
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.. or maybe just switch to a credit union ...
[www.mymax.net]
Sure I've got to pay
1) Pay a bill every month online (I do that anyway)
2) Use my check card (I use it enough just buying gas)
If I forget ... It's still free I just dont get any
interest that month....
@bohemian: I have a Wachovia checking and an ING online savings account. I have direct deposit a portion of my check into the savings automatically. If I need to transfer from ING to Wachovia it's easy to do online, but it takes 2 days to transfer because it's one bank to another. (Which works fine for me, as I'm not in a huge rush.) I think that if you have both ING checking and savings, the online transfers are instant.
@bohemian: ING Direct gives you the option for a line of credit to cover overdrafts. You have to pay a higher interest if you go over, but no fees. Also, you can quickly transfer money from your savings account into your checking account so you only pay interest for one day (assuming you have the money sitting there).
I have checking accounts at two banks and savings at three, primarily for the reasons stated above. But you have to be very careful about how you xfr money between them -- banks often load the quick & easy ways like ACH with fees for pushes and/or pulls. You have to keep up on the fees or you'll get burned.
@bohemian: How ING works: You transfer funds electronically. There is a hold period of a day or two, where you do not earn interest. But their online bill pay is free.
And there are no 'overdrafts' with ING. If you go charge over your balance, you are charged a modest interest on the negative balance. There are no overdraft fees.
I have a totally free checking account, no minimum balance required, it earns a small amount of interest and is incredibly free of annoying requirements. It offers several credit cards...mine has a little less than 10% interest. It offers an incredible variety of services. I use a credit union. People need to wise up about banks.
@bohemian: I have an ING account and a regional bank to transfer funds. The only reason I really use it is that one of my CC does not have online payment, so ING sends a paper check for me for free (and fast!). Also, regarding the debit card transactions, they offer a overdraft line of credit and charge you interest. I keep very little money in this account and was double billed by a company, and although ING reversed the overdraft interest (no set fee like most banks), it would've been a $.02 fee. yes, two cents.
Does the age of the bank account factor into your credit score at all? Wachovia pulled the charge $10 for overdraft even though I had overdraft protection in place deal. I've been a customer for easily 20 years without ever overdrafting.
I'm considering going the credit union route, or the ING route (I already have a savings account there).
CapitalOne has a totally free checking account - no minimum, no monthly fee, no minimum requirements, etc. No interest, though. I opened one solely for the purpose of depositing paper checks (I have a side job as a freelancer). After it's cleared, I transfer it electronically to a high-interest online account (currently getting 4%). I only keep $1 in there at all times to keep it open.
I used to have a Chase account for this purpose (this was actually my oldest account - started out as Fleet, then WaMu, then Chase), but then Chase decided to start charging $3 for electronically transferring money to an external account. Fark that. Closed that account right quick and opened the one at CapOne.
I have to write real paper check to my CSA every two weeks. Does ING "checking" have the ability to do this?
@missdona: I see that it has a send a check option, but I need to go there with the check.
If I have to have a check printed and mailed to me, for me to deliver there, it seems like too much hassle.
In the Washington, D.C. metro area PNC Bank took over the old Riggs Bank. I have a PNC "free checking" account and while it does not pay interest it does have some pretty good features including reimbursing all ATM fees -- so I can use any ATM, accept the $3 fee, and have it instantly credited back. I think the minimum balance if you want the ATM fee refund is 2,000. So if I make 13 ATM withdrawals in a year (I do) I come out ahead on the $40 in interest (at 2%) I "lost."
PNC also offers free bill pay. They also have great customer service in the bank itself -- usually free coffee/cookies, great staff, and free coin counting machines. They also provide free notary public service. I keep waiting for them to start charging outrageous fees, but it's been several years now and they haven't yet . . .
PS - I know this sounds like a commercial for them, but I don't work for them -- just a happy customer.
www.schwab.com
Free checking+brokerage account. Voted best checking account by Kiplinger's last year.
ATM fee rebates. Free checks. .75% interest on the checking account. Free overdraft debits from brokerage account.
I don't really know how it gets better. Oh, and while you *can* mail your checks to Schwab, you can also drop them off at a branch, they will depost it in your brokerage account, generally in a ridiculously short period of time. Like 18 hours.
I'm still grandfathered in from WaMu's free checking (2 accounts). Been working great for three years. Just remember, if you don't do 'something' once a month with your accounts, Chase will kill your grandfather and 'upgrade' you to a paid checking account.
My former WaMu Online savings account is now at 0.5% interest, down from 5% when I opened it three years ago. I actually make more with my Amex Blue Rewards card.
I have a brick and mortar bank checking account in which I keep just a minimal amount of emergency money. Then I then have a checking and savings account with a national bank. If I maintain a certain balance across all accounts, including my linked credit cards, then I have no fees at all. I keep a minimal amount in the checking account, I essentially just transfer money to it when I need to write a check which is once a month. Keeping the checking and savings with the one bank allows me to transfer money between them much quicker. If I had to do it between different banks it could take half a week, but with the same bank its good that day.
my credit union doesn't offer an exactly free checking account, but at a dollar a month with 0.75% interest earned - it amounts to pretty close to free and there's no minimum balance, they don't stack payments to make you suffer, no ATM fees at their credit unions or any other hundreds of credit unions in the network, etc.
if i had enough money to keep more in there, i could actually earn a little profit on the interest over and above the $1 month fee.
USAA. Nuff said.
I've had bank accounts at both credit unions and banks, and although I still prefer my credit union, I do have a totally free checking account at a bank. There's no minimum balance, no monthly service charges, and checks are free. I don't earn any interest, but I also only keep enough money in my checking account to pay my basic monthly bills, plus a little cushion. Everything else goes into a high yield savings anyway.
My point is that there are great accounts out there, and BOTH banks and credit unions. You just have to do the research first. While I prefer my credit union for personal reasons, strictly speaking, the bank actually has a better account. I have a free account at the CU too, but only because I maintain a certain amount of qualifying services. Credit Unions aren't always better, although they usually are...
As a student I don't have the money in my acount to benefit from the interest in the pay checking accounts, I'd actually loose more money than I got back with interest. And since I only use my bank's ATM and don't get charged overdraft/minimum balance fees it seems to all work out. All in all the only time I pay my bank is when I just have to use a non-bank ATM which has been twice in three years.
Everyone always brags about the credit unions, but I dropped mine recently. They scaled back their hours to the point they were only open about 20 hours a week. The days they were open, they would only have one or two tellers working for a line of 10 people, it was getting ridiculous. The straw that broke the camel's back for me was when they told me they were going to start charging $3/mo for paper statements.
I started an account with US Bank and while I admit I'm still in my honeymoon period with them, it looks like a really good plan. No minimum balances on checking or savings, no monthly service fees; You do have to have a savings acct open in order to keep the free checking, but there's no minimum balance so I just keep $25 in there. Seems like a fair deal to me, especially compared to the garish, "Free checking is not free!" article title. Mine's about as close to free as you can get.
Wow, my B&M bank (formerly Commerce now Metro) has totally free checking, no fees for using online bill pay, refund of ATM fees on non-Metro ATM machines (up to 15 times a month), instant approval and availability of payroll check deposits/federal checks/state checks/insurance co. checks, free change counting machines, open 7 days a week (and long hours too!), and interest (not much but it is there). The only thing I have to pay for is new checks after the first box but since I don't usually use paper checks for anything I still have 3 books of paper checks left from my original free box when I opened the account 3 years ago. As unhappy as I was about how the Metro change-over was handled, I still love the perks and convience of my checking accts. there.
I just use my credit union. BECU, Maybe not the GREATEST interest, but yes interest on everything. Free online banking, we have been very happy with them. I don't know of any reason for me to actually use a Bank rather than a credit union.
Jim's analysis finding that a "free" checking account costs $100 a year is flawed. He's basing the $100 value on the lost interest by assuming that you would keep the $5,000 in a high interest account instead. First, this means you would have zero money in any sort of checking account. Second, he's assuming you can even get 2% - maybe you have a high yield savings account, but if you don't you must open one, and there are non-monatary costs to that you need to factor in. Third, I've had several free checking accounts, and none of them required more than $1,000 min balance. Currently, Sovereign Bank and Citizen's don't require a min balance. TDBank North waives their $15 a month fee with only $100 min balance. Community banks are even better.
"The bank may not be charging you a fee, so it's technically "free," but they're not giving you your due."
Look - banks do a lot of scammy things, but they are pretty clear that a "free" checking account doesn't pay interest. You've made an informed decision to have the free account. You aren't "due" anything. You want interest, open a interest bearing account - but be prepared to pay the monthly fee, often more than the interest earned. But at least you're getting what's "due" to you.
Bottom line-yes, there is a "cost" to a free checking account. You have to open the account, get the monthly statements, transfer month, keep a balance (in cases), and all the normal costs that an account holder runs into. However, I've yet to see a "free" account that has the "hidden" costs greater than the monthly fee for a regular account.
Do your research, and I know credit unions are touted here a lot but there's a reason: the good ones are usually far and above the best banks. Coastal Federal CU has free checking with no minimum balance, no fees and actually pays 4.01% APY on all funds in there, so it's much higher than most high yield savings accts. Overall, I'm definitely satisfied (been with them for going on 2 years now).
@joshuadavis: i have a no fee student acct with TD Bank. It got grandfathered in as a no minimum balance needed. Most of my banking is through USAA but I like having a hidden account with money i forget I have. Usually I keep the balance at about 100 bucks.
@winshape: Overdraft protection almost always incurrs a fee. The "protection" is from checks bouncing. Instead, they cover it and you go negative. There is a fee for this service. Yours was $10 which is crazy-low.
This is why I like credit unions. In general, they rip you off a little bit less often :).
My CU offers free checking, no minimum balance, but you have to pay for the checks unless you qualify for those too. They also have an interest-earning checking, which is also "free" but you must keep your checking balance over $500. If it goes under that much, there's a penalty fee. Also there's free overdraft protection.
@racordes: That's funny, because I use Wells Fargo. They are not a credit union. They're one of the "big, bad banks that try to screw you over". My checking account does not have a minimum balance requirement. I am able to transfer money with their online interface to or from any other account at any other bank that I have. I am also able to transfer money to other Wells Fargo accounts of other people (such as if I need to send my parents or my parents-in-law money - this has happened on a couple of occasions, such as when I went out to dinner with them and it was easier to just let them pay and give them money later). If I wanted bill pay, I think there is a small fee for it every month, but I prefer to make my payments online at the time I desire by just going to whatever website and doing it. I never pay fees, and I even earn a small amount of interest. I also have a savings account with ING for storing money when I don't need it in checking.
If I overdraw my account, then yes, I would get overdraft fees. However, as long as I am responsible with my money and think before making purchases, this doesn't happen.
why would I keep 5000 dollars in a no fee checking account? I barely keep 100 bucks in my TD checking account. And my USAA account is all over the place. Though I do like I earn interest when the checking account randomly has over a grand in it. Like when I'd have my rent money sitting in the account in the week before my landlord actually cashed the check.
@samurailynn: Oh, and I forgot to add... the one time I did try using a local credit union, I got screwed over by stupid fees. I specifically requested that I needed an account that I would use rarely, and that I didn't want any fees that I had to worry about. The person setting up the account assured me that she was setting up a fee free account, nothing required of me to not get fees. I didn't have any transactions one month (no deposits and no withdrawals) and I ended up getting a "non-usage" fee of something like $10. When I went in to try and straighten it out and told them how I had been told it was an account with no fees, I was basically told that that was ridiculous and that any other bank would charge me if I didn't make any transactions in a month. I closed the account immediately, and I don't plan to try out any of those other "wonderful" credit unions. Silly me for thinking that a local business would treat it's customers right.
@samurailynn: We dumped Wells Fargo decades ago. The account was supposedly totally free including checks. This was the era before debt cards. They promptly charged us some insane amount of money for the checks without telling us. This put our account over. Since they were one of the first banks to do the biggest check first to harvest as many OD fees as possible we got hit hard. This was also the days before online banking so we didn't know we had an OD until it was too late. We promptly closed that account and went back to our old bank.
@matt314159: Seriously. My Wells Fargo account has always been free as long as I have direct deposit. (Actually, while I was a student, it was free no matter what.) However, I've gone for periods of a little more than two months without direct deposit, and they've never charged me a monthly fee. At one point, when I realized that was going to be happening, I called and talked to someone to find out what the fee would be so that I would be prepared for it. The person I spoke with basically told me that I would need to go without having any direct deposit for a while before they started charging me a monthly fee, but that I could also always check in with them and let them know what was going on to avoid it. Yeah, big banks are so horrible.
@winshape: We are working on having multiple accounts at multiple banks or credit unions. That way if something stupid happens to one account your not left hanging unable to buy gas or food while the problem is straightened out. It also serves as protection against being left stuck while traveling if one account gets fraud locked. We had that happen. Luckily it was a bank with decent customer service and they changed it asap, within minutes.
We have kept a Paypal debt Master Card solely so we can have some separated back up cash when we travel. I am not a fan of actual credit cards so this has seemed to work.
@henrygates: So do you start the transaction to move the money with ING and they do it as a charge against your brick and mortar account?
Both of our brick and mortar banks are in the dark ages as far as online banking goes. We can do online bill pay but the only option is a paper check sent for you. The only other way is to make a payment somewhere or have an EFT request sent to said bank.
@aphex242: Yup, I LOVE my Schwab account. The instant transfer from checking to brokerage (and vice versa) is the best -- no more waiting a week or more for an electronic transfer to/from E*Trade to clear.
I use USAA for savings and checking. Both are free and I never have to visit a branch (the only one is in TX). To deposit checks, I take a picture of them with my iPhone and they're in my account! No waiting, no fuss.
And I've never called them and not had my issue resolved immediately. I've never seen anyone face to face, but I can't rave about them enough.
Oh, and because I use their banking services (decent APR), I get a nice break on my insurance, etc.
If you have the means, I recommend USAA highly.
@nightshade74: My credit union is similar; the checking is free if you have your paycheck (or something) auto-deposited every month. No minimums, no fees; just auto-deposit a check. (Which cuts down on their teller depositing, that's the rationale.)
Ours is tied to a savings account with a reasonable rate of interest, and the checks are actually deposited into the savings but the checking tied to it is still free.
@aphex242: REALLY? I always mail mine in and thought the branches were for stock stuff only. I'll have to try that out!
In Canada we have a few decent choices. I'm using PC Financial. No minumum, no fees, 0% interest, free cheques, free use at all CIBC and PC machines. For savings I just manage my money properly and use a PC savings account. Also no minimum and the % was pretty good before this recession (4%).
@racordes: Me too. I have National City, which I'm not super happy with, but my checking account has no fees, free checks for life, no minimum balance, and earns interest. The only thing is you have to have direct deposit twice a month, which I do since I have a job. I don't see what the big deal is.
Here in Houston - I use Woodforest Bank for all my accounts ... totally free checking, interest paid and because I'm of -- ahem -- a certain age, cashier's checks are free and money orders are a quarter. Deposit go in the same day, and wire-in's and direct deposit hit my account as soon as the bank receives them ...
There ARE free accounts out there -
USAA //end of topic//
You aren't giving up $100 in interest on that $5K. You're giving up $100, minus federal income tax and state tax.
Let's call those 28% and 12% respectively. (My state charges 12% on out-of-state bank interest, which sounds unconstitutional to me, but what do I know.) That $100 is now $60.
So by giving up $5 a month, you get an otherwise-free checking account. I wouldn't complain at that deal.
I love my Credit Union. If I have money in my savings account and accidentally go over with my checking account they automatically transfer from saving to checking. They allow me to do this a couple of times a month. Last time I did this once to many I got charged 2 dollars.
My free checking pays 6.01APY on any amount up to 25k. Free ATM nationwide. No Min balance other then the 10$ to open the account.
Obviously ING spends too much on ad placement, because they are in the bottom quarter of online accounts in terms of interest. It's correct that free checking is not that great a deal, but only because there are plenty of reward checking accounts that offer 4% interest.
I keep hearing how great these ING accounts are. How exactly do you transfer money between the ING and your brick and mortar account.
Does the ING checking have 101 gotchas on debt card transactions the way most banks do now? Where you get the cascading pile of overdrafts because you went a few dollars over or letting card swipes go through when you don't have the fund in order to ding you for a fee?
I have seriously thought about getting an ING account to diversify our money but I waste enough time babysitting our current account. I don't need double the time wasted.