Foolish Checking Accounts

Q: I'm looking for the best checking account in my rather smallish college town. There isn't that much to choose from, but one bank offers free checking with no interest on the account. Is this a better deal than getting an interest rate of 1 percent, but with monthly fees? -- E.G., via the Internet

A: Despite what you may have heard or read in a bank advertisement, there is no such thing as a free checking account, though a bank may offer you a "free" account with certain conditions attached.

These conditions might include no use of ATM machines, maintenance of a certain amount in the account, very low or no interest paid on the balance, or fees for everything beyond writing two checks a month. Those small-print conditions can add up to plenty of charges if you aren't careful -- and a lot of foregone interest earnings if you maintain much of a monthly balance.

Even though in the world of banking there are dozens of different names, the majority of checking accounts fall into three basic categories:

  • 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 charges lower fees and requires a lower monthly balance.
  • An account that pays somewhat better interest (called "high interest," "super interest," "checking plus," "success checking" or any number of other misnomers), charges higher fees, 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 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 more 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 percent 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 is doing out there.

No matter where you live, work, go to school (or cut classes from), you can have an account at one of the country's best banks. Banks that are operating primarily on the Internet are able to provide much better interest rates than the standard marble-lined bricks-and-mortar banks because they don't have the same sorts of expenses as the standard banks. Currently, there are plenty of banks on the Internet giving interest rates of 5 percent or higher on the same type of checking account that your local bank offers with a 1 percent interest rate. Surf around for the best deal. Start your search with the Internet Banker Scorecard at

WHAT NOW?: Another way to save on your checking account is to 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 the price by going directly to the printer. Check out or

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