BANKING

Foolish Checking

Banking

Repeat the following to yourself over and over and over again until you have it completely memorized:

"There's no such thing as free checking. There's no such thing as free checking. There's no such thing as free checking. There's..."

Okay. You probably had that memorized after the very first try, but we just wanted to make sure. The maxim that there is no such thing as free checking is a lesser-known subspecies of the more popular and well understood catchphrase, "There's no such thing as a free lunch." When you hear "free checking," start thinking to yourself, "What's the catch?" While there are many fine checking accounts that can be used for free, they typically are accompanied by lower interest rates than an account that doesn't advertise itself as being "free."

The opportunity cost of putting money into an account that does not have the highest interest rate makes these accounts not quite free. Even though the payment you make doesn't necessarily take the form of actual charges, by accruing less interest than you otherwise could get for your savings, there is a real cost for this "free" service. Put another way, the nation's banks (which are very profitable institutions) aren't exactly going broke by offering lots of free services. They're making a big pile of pretty pennies from all the services they claim are provided for free.

Furthermore, "free checking" accounts typically (though not always) come with strings attached in the form of numerous mysterious fees. Come to think of it, all checking accounts come with strings and hidden fees attached, and the number of strings has been growing at an explosive rate over the last few years as banks have been dreaming up even more fees to inflict on their customers.

At the same time, the largest national banks are offering interest rates on their checking accounts that are about one-quarter the rate that can be found at smaller regional banks or through Internet-based banks. According to a recent report published by bankrate.com, none of the 50 largest banks in the country make it onto the list of the best checking accounts. Between the nasty fees and the missed interest, the worst checking accounts in the country cost someone who maintains a monthly balance of $1,500 a month around $300 a year. If you read through our piece on gathering your records and made a study of where in the world all those fees are coming from, you should know exactly where you stand with your bank.

Learn the Interest Rate Environment

Even though in the Wise world of banking there are dozens of different names, there are really only about three different types of checking accounts:

  • An account that pays no interest and charges relatively lower fees, which might be called something like "economy checking."
  • "Basic checking" accounts for low-income earners, which also won't pay interest, but charge lower fees and require a lower monthly balance.
  • An account that pays very low interest (called "High Interest," "Super Interest," "Checking Plus," "Success Checking" or any number of other misnomers), charges higher fees for your mistakes, and requires a higher opening balance and higher monthly balances.

Any one of these might be called "free checking," (since the term "free checking" has no precise meaning), but here's something to keep in mind when deciding which account might be right for you: depending on the account balance you maintain and the interest rate offered, you may be better off in a no-interest account. According to a recent survey, the average amount that an account holder needs to maintain to avoid fees on an interest-bearing checking account is greater than $2,000 a month, and the average monthly service charge assessed on an interest-bearing account is almost $10 per month. Keeping $2,000 a month in an account that pays about 1% interest a year (earning $20) while paying $10 per month in fees (losing $120) means a net loss of $100 a year. Fool, you can do a lot better than the average consumer out there is doing. Click here to find account fees and conditions offered by institutions in your area. Click on virtually any banner ad on the Internet (on this site or anywhere else) to find higher rates than the nation's average.

Customers who keep an average of $5,000 or so in their checking accounts get better deals from their banks, but they really shouldn't be maintaining that much money in a checking account in the first place. The opportunity cost of leaving thousands of dollars in an account that pays virtually no interest is really quite high. You should keep about as much in your checking account as you need to pay the monthly bills and avoid a minimum balance charge -- the rest should be kept in a higher-interest account such as a savings account, a CD, or a money-market fund. You can then transfer money from the higher-interest accounts to your checking account as needed, keeping in mind the limits and fees that apply to making transfers.

Go out and find the best interest rates available for your checking account dollars. A smaller local bank or credit union will likely have checking accounts with interest rates double that of the big national banks. Internet-based banks have rates that are closer to three or four times the rates offered by the national Goliaths, and we'll look at them later.

Questions To Ask Before You Open An Account

Here's a checklist of questions to keep in mind when you're either sitting down with a bank employee to discuss opening an account or surfing the Web to determine whether an ad you've clicked on has really brought you to a site where you might want to do business.

  • What is the interest rate on the account? If the account does not pay any interest, what is the difference between the fees charged on the interest account and the non-interest choice?
  • What is the minimum deposit necessary to open the account? What is the minimum balance necessary to avoid a fee once the account is open?
  • What is the per-check charge? What is the charge for ordering new checks?
  • What is the charge for a bounced check?
  • Are canceled checks returned with the monthly statements? If not, what are the charges for having a canceled check returned?

Other Ways to Keep Your Costs Low

  • Use direct deposit. If you do, your bank might give you free checking. Remember, of course, that "free checking" is seldom really free.
  • Order your checks direct. While some banks will charge about $25 for an order of 200 checks, you can get the same thing for one-quarter of the price by ordering direct from the printer. Check out http://www.currentchecks.com/ or http://www.checksinthemail.com/.
  • Think about online bill paying. You'll save money on the stamps. We cover the ins and outs here.

Next stop: Can you actually save any money if you're using a "savings" account?

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