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Opening a new account with a financial institution can be a lot like a whirlwind romance. At first, you'll be showered with perks and freebies. Only later, as reality sets in, will you notice that your relationship with your new financial partner may not be as perfect as it seemed to be.
Despite the emergence of powerhouse national banks, there's still plenty of competition in the financial industry. It's hard to avoid pitches for all sorts of financial services. Even though the credit crunch supposedly tightened credit standards at major banks, that hasn't stopped floods of card offers from arriving in the mail nearly every day. With rates at extremely low levels, banks have to fight for your deposits with intriguing offers. And in the brokerage world, discount brokers are engaged in an all-out war to get your business.
Some of the offers you'll get from financial institutions are amazingly attractive, and they can definitely be worth your while. But don't assume that those perks come without strings. Here are some common gotchas you'll find if you look closely at the fine print.
Balance transfer fees
Lots of credit card offers come with offers to transfer your balance to a new card at a promotional interest rate. They're especially attractive if you're carrying a balance on another card at a much higher rate. For instance, if you can transfer a $10,000 balance on a card charging 20% to a new card with a 12-month 0% promotional rate, you'll save $2,000 over the course of a year.
The problem, though, is that you'll often find somewhere in the offer that you have to pay a balance transfer fee, based on a percentage of the amount you transfer. Citigroup (NYSE: C ) , for instance, charges 3% of the transferred amount as a fee. Discover Financial (NYSE: DFS ) hits you with a fee of 4% to 5%. With these and other companies facing fallout from credit card reform, fees like this help card companies stay profitable.
Now granted, $300 or $400 is a lot less than $2,000, so it may still be worth it to make the switch. But those fees can add up, especially if you're hoping to make transfers regularly to give yourself time to pay off large amounts of debt while taking advantage of as many promotions as you can find.
Bank service charges
Similarly, many banks give you incentives to open various types of accounts. They do so hoping that the fees they'll charge will repay them for their initial generosity.
Overdraft fees and ATM transaction fees have received a lot of attention lately, and they're clearly an important source of revenue for banks. At Bank of America (NYSE: BAC ) , for instance, you'll pay $2 in the U.S. and $5 internationally if you use the wrong ATM. For Wells Fargo (NYSE: WFC ) , the cost is $2.50 and $5 respectively.
If you're careful and consider whether a prospective bank has convenient in-network ATMs, you can avoid all those fees. But you have to think about it up front, and it does take some effort to look into it, which is easy to forget if you're getting a new account with features that you really like.
Miscellaneous brokerage fees
Lately, there's been a big price war among discount brokers, many of which are offering lower commissions and even commission-free trades on ETFs. Where you have to be careful, though, is in making sure that your broker won't charge you fees for things that you'll be doing as part of your ordinary investing.
My personal pet peeve among miscellaneous fees is called a corporate action fee. What happens is that if a stock you own goes through some sort of reorganization -- such as a reverse split or a merger -- your broker charges you for accounting for whatever the reorganization requires. Most brokers charge something for these transactions, including E*Trade (Nasdaq: ETFC ) , TD Ameritrade (Nasdaq: AMTD ) , and Charles Schwab (NYSE: SCHW ) .
Other types of fees can be equally annoying. You may get charged a fee for closing your account, making transfers, or even doing nothing with your investments for an extended period. And given all the competition in the industry, don't expect those fees to go away anytime soon; they may prove increasingly essential to the survival of brokerage companies.
How to cope
You can't hope to avoid fees entirely. What you can do, though, is pick a provider whose fee structure matches best with your own tendencies. So if you're not as good at balancing your checkbook as you'd like, choose a bank with lower overdraft fees, even if it means giving up the best interest rate. If you trade stocks infrequently, pick a broker with no inactivity fees, even if it means paying slightly more in commissions. You'll end up ahead.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.