Banks today make much of their money from convenience -- and from inconvenience.
More than 40% of bank revenue now comes from fees on consumer accounts. But a careful customer can take advantage of the services banks offer and avoid paying many fees. Also, you could consider joining a credit union. (See "Ditch your bank for a credit union.")
Choosing a bankThe Federal Deposit Insurance Corp. insures deposits in most banks and savings associations in the United States. That coverage was recently raised to $250,000 per depositor, per insured bank. Insured banks display the FDIC sign. You can find out if your bank is insured, or find one that is, here.
If you have money in a credit union, the same protections exist under the National Credit Union Administration, another government agency. While bank failures are rare, they do happen, so it's good to know your coverage.
Before you open an account, here are 10 things you should know.
Opening an accountThe most basic bank service is still the checking account, and there are lots of choose from, including free accounts with no minimum balance, NOW (negotiable order of withdrawal) accounts that pay interest as long as a set minimum balance is maintained, and money-market deposit accounts, which pay higher interest but require a higher balance and limit the number of checks you can write. Some banks offer special accounts for seniors and students.
- Ask the bank for a detailed description of each type of account, including monthly fees and penalties for not living up to specific terms, such as writing too many checks or not keeping enough money in the account. It will probably have a brochure or Web page to review. (Compare local checking accounts here.)
- Once you've opened the account, avoid overdrafts. The fee for nonsufficient-fund checks has risen to an average of $30. Banks usually honor the largest check first, leaving less money to cover smaller checks. So instead of bouncing one large check, you could end up paying an NSF fee on each of the smaller checks, as well as the fee charged by each business that was shorted. (See "Bank fees are more outrageous than ever.")
- Many banks automatically enroll their customers in so-called bounced-check protection. The bank will cover your NSF check, up to a certain limit, but you'll still end up paying the bank's NSF fee plus daily fees until you've made good on what you owe. Standard overdraft protection is a better buy. For a small fee, the bank will draw on your savings account, credit card or line of credit to cover bad checks. (See "Don't be duped by bounced-check 'protection'.")
- Sometimes overdrafts occur despite your best efforts. Though banks quickly process checks you've written, they can be slow when making deposits available in your account. The hold time can be 10 business days or more for large or nonlocal checks. If you are cutting things close, ask when your deposit will be available. Also, expect a delay when making a deposit at an automated teller machine that is not on your bank's premises. (See "Now bounced checks can trash your credit.")
Debit or creditWhen you open an account, you will receive a debit card, which will allow you to access cash at ATMs and make purchases at stores. Again, watch out for pesky fees.
- If you use your card in a cash machine owned by another bank, you'll pay a fee of as much as $3, and your bank will charge a fee, too. Paying $6 to withdraw $40 isn't smart, and you might not even realize it's happening.
- Many banks also charge a fee when you make purchases with your debit card. When the cashier asks, "Debit or credit?" after you present you card, pick the credit option and avoid the fee.
- If you use your debit card when making hotel reservations or buying gas, merchants may put a hold on your account that's more than enough to pay your final bill. (See "Hosed at the gas pump -- by your debit card.")
SavingsBanks offer basic, low-interest savings accounts and higher-interest money-market accounts to grow your money while still making it quickly available to you. Some banks charge fees to maintain the accounts. (Compare savings accounts here.)
- Shop around for the best deals. Brokerage firms, for example, offer access to a variety of bank certificates of deposit. If you want more bang for your buck, money-market funds available through mutual fund companies generally pay a higher yield and don't have an early-withdrawal provision. (Compare bank money-market funds here.)
- Certificates of deposit mature and pay interest in 30 days or more, usually with a higher interest rate the longer the term. A penalty is charged for early withdrawal, so make sure you won't need the money. (Compare CD rates here.)
ConvenienceImproved technology means you no longer have to stand in line to take care of your banking business. (Some banks even charge a fee when you speak with a teller.) Take advantage of services that can simplify your banking habits.
- Sign up for direct deposit of your paycheck. (See "Streamline your finances in 8 steps.")
- Use online banking to review your records at home. Go paperless to reduce the possibility of identity theft, but make sure your computer security is up to date. (See "Go paperless for safer banking.")
- Choose automatic payment for bills that don't vary from month to month, such as a mortgage, car loan or student loan. Double-check the amount each month to be sure it's correct. Watch your statements to make sure the address or amount due hasn't changed. (See "The perils of automatic bill pay.")
- Banks also provide impound or escrow accounts that set aside money to pay your homeowners insurance and property tax as you make your mortgage payments. Escrow accounts are a requirement for some, but not all, mortgages. Some states require banks to pay interest on escrow accounts, so make sure you're getting what you are owed. Also, verify that your bank is making the insurance and tax payments on time.
If you've got a hint we haven't included or find a factual error, let us know by sending an e-mail to Five.email@example.com.
Updated March 26, 2009