Published in: Banks | Oct. 19, 2019
The 7 Biggest Banking Mistakes Nearly Everyone Is Making
By: Kailey Hagen
Almost everyone does at least one of these things.
On the surface, banking seems simple enough. You pick a bank, put your money in it, and borrow from it when you need to make a large purchase. That's correct in theory, but it's a gross oversimplification -- one that costs a lot of people a lot of money.
Banking smart means understanding what each of your accounts has to offer and how it stacks up against the other options out there. Failing to do so can cause you to miss out on valuable opportunities to save money or grow your existing savings. Here are seven of these common banking mistakes, which too many people are making.
1. Remaining unfailingly loyal to their current bank
When most people buy a product or service, they do their research to make sure they're getting the best possible deal. Yet when it comes to a bank, most people still use the same one they used to open their first account in their youth. That isn't necessarily a bad thing, but if you're not comparing its bank account fees or loan interest rates to those of other banks, you could be missing out on the chance to hold onto more of your cash or grow your savings more quickly.
Research other banks to see if they can offer you a better deal. If you're not sure what kind of interest rate your savings account offers or what your APR on your loan is, contact your bank for more information.
2. Only looking at brick-and-mortar banks
Brick-and-mortar banks used to be the only kind that existed, but with the rise of the internet, several online-only banks have cropped up. There are pros and cons to this new approach. Online-only banks have less overhead because there aren't as many people or physical locations to pay for. They can pass the money they're saving onto you in the form of lower interest rates on loans and higher annual percentage yields (APYs) on checking and savings accounts.
But the lack of physical locations can mean it's more difficult to get support if you need to speak to a real person, and depositing cash can be challenging and require a transfer from a deposit-accepting ATM or from a brick-and-mortar bank to your online bank account. Still, their favorable rates make them worth a closer look, even if you also keep some money in a brick-and-mortar bank for the sake of convenience.
3. Sticking with a low-yield savings account
The average savings account APY is only 0.09%. By contrast, some high-yield savings accounts offer APYs in excess of 2%. To give you an idea of the kind of difference that can make over time, let's consider a $10,000 deposit left untouched for five years. If you had a savings account with a 0.09% APY, that money would only be worth $10,045 after five years. But if your savings account had a 2% APY, it would be worth $11,041 -- nearly $1,000 more.
Low-yield savings accounts aren't a great place for storing money long-term because these funds are virtually guaranteed to lose value as inflation drives up the cost of living. High-yield savings accounts grow at a rate closer to that of inflation -- which has historically averaged 3% per year -- so your money will retain almost the same buying power when you take it out in a few years.
4. Paying a fee for your checking account
There are so many free checking accounts available today that it just doesn't make sense to pay for one. Some checking accounts are truly free while others may be free only if you maintain a certain balance or make a certain number of transactions each month. Make sure you read the fine print so that you understand any associated fees and what could cause them to kick in.
5. Keeping too much money in your checking account
Most checking accounts don't earn interest and those that do typically offer interest rates that are even less than the abysmally low savings account rates mentioned above. Stashing too much cash in your checking account could cause you to miss out on the opportunity to earn interest on your savings. Leave just enough money in this account to cover your basic monthly living expenses, plus a little extra to avoid overdrawing your account. Put the rest in a savings account. You can always transfer it back to your checking account later if you need to.
6. Enrolling in overdraft protection without understanding it
Opting into overdraft protection means that if you try to withdraw more money from your bank account than it contains, your bank will allow it, but then it'll charge you a fee. This fee applies even if you try to withdraw a single cent below your balance, and you pay this fee for every withdrawal from your account until you put more money in.
The overdraft fee varies by bank, but it's typically around $35. So if you overdraw your account several times, even if each transaction is only a few dollars more than the funds you have available, you could easily cost yourself $100 or more in fees.
Fortunately, the government now forbids banks from automatically enrolling you in overdraft protection. You must opt into this program if you want this protection. Otherwise, if you try to spend money your account doesn't have, the transaction won't go through.
7. Not looking over your transaction history
You're probably in the habit of checking your credit card statements for fraudulent purchases, but you should also be looking through your bank statements in case there are any errors or duplicate charges. This may also be the only way to know if someone is fraudulently accessing your bank account.
Catching these errors quickly makes them easier to resolve. Notify your bank immediately if you spot any activity you don't recognize and check your other financial accounts and your credit reports if you believe you're a victim of identity theft to see how widespread the damage is.
Banking is simple in principle, but there are a lot of nuances you must be aware of if you want to maximize your profits and minimize your fees. If you've made any of the above mistakes, that's OK. But take steps now to prevent yourself from making them again.
Savings account rates are skyrocketing -- Earn 23x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 25x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2019.