A checking account opens the door to financial independence, but comes with a great deal of responsibility. The Banks make billions of dollars off customers who do not understand how to operate their accounts efficiently. Banks have very strict rules around how accounts must be managed and the cost of non-compliance comes in the form of high fees. Much of a bank’s profitability is dependent on the customer’s fee tolerance.
Common Bank Fees To Look For Include:
- Monthly maintenance fees (can be waived if certain criteria are met)
- Foreign ATM fees charged when other bank’s ATMs are used
- Overdraft and non-sufficient fund fees (fees are often charged if the bank pays the bill or not)
- Physical statement fees (online statements are usually free)
- Balance inquiry or mini statements received at ATMs
- Teller transaction and debit card charges sometimes incur fees on accounts with no or low maintenance fees.
When you open an account there will be a set of rules, that when followed, will eliminate or minimize fees. Understanding how you will use the account will help you select one that will closely match your usage patterns. Then learn the requirements of the account and follow it exactly.
When opening a checking account there is the choice to have the bank pay for charges that will cause an overdraft or you may opt out of overdraft protection. If you opt out, , your purchases or bills will be declined or returned if you do not have enough money in the account. If you opt-in the bank will cover the purchase or pay the bill and then charge you an overdraft fee. Opting out can reduce overdrafts, but may not eliminate them.
Overdrafts can still occur if you write a check and there is not enough in the account to clear the check when it posts. Whether the bank pays or returns the check, a fee will be charged. You can also receive fees if you use your debit card when a temporary transaction has not cleared, sending you into the negative. For example: This can happen if you purchase gas, which only temporarily approves $1, but you spend $30. Then you use the card again, without taking the $30 charge into account. An overdraft fee is accessed even if you are one cent in the negative. If you have several small charges a fee can be charged for each purchase.
There are two types of overdrafts. The first is an overdraft charge and the second is an overdraft account.
Overdraft Charges are incurred when you go over your balance and the bank covers the transaction for a fee. These fees can be as much as $40 per transaction.
Overdraft Accounts access a different account, should you not have enough money in the checking account. An overdraft account is generally a savings account, second checking account or credit card. When a bank transfers money from the second account the fees are much smaller, generally around $10 per transaction.
Using an overdraft account also involves a few important rules:
- Over drafting from a savings account will reduce the savings balance and can result in fees on the savings account if the balance falls below the minimum or you have excess withdrawals. Generally a savings account allows between 3 and 6 withdrawals per month.
- Over drafting from a credit card is considered a cash advance. Interest begins immediately at the highest interest rate. You generally must have a credit card with the same bank in order to use this option for overdraft protection.
- Using a line of credit like an equity line will charge interest at a much lower rate and is often a better option than a credit card advance.
- Bank line of credit. Some banks offer a cash reserve line of credit specifically for overdrafts. You must qualify to gain one, but if you do not have other overdraft options this is better than paying high overdraft fees.
- Setting up an overdraft account can result in NSF fees if there are not enough funds in the second account to cover the purchase.
In the first quarter of 2015 the top 600 banks in the US collected 2.5 billion dollars in overdraft fees, with the largest three banks collecting 1.1 billion¹. Given that the average overdraft fee costs $35, this is a very expensive way to borrow money.
ATM charges are another way banks siphon money from consumers. Banks generally do not charge fees when you use their ATMs. In fact, banks encourage customers to use e-banking and ATMs in place of visiting a branch location, which is more expensive for banks to operate.
Where banks make money is when you use a foreign ATM (or an ATM other than your bank). These charges can be as high as $2.50 per transaction and the fee is charged by both your bank and the bank’s ATM you are using.
So while a $2.50 charge does not sound like much, you are really paying up to $5 per transaction when you consider the fees from both banks. If you are only taking out $20 then you may be paying 25% more to receive your own money.
The best way to avoid foreign ATM fees is to use the ATM from your bank. This can be a challenge for those banking at smaller institutions. Another way to eliminate foreign ATM fees is to visit a store that allows cash back. This includes most grocery stores and supermarkets. Buy a pack of gum, drink, or other small purchase and then get cash back from your purchase. This will save you significantly over the course of a year.
The banks make millions of dollars off fees each year. While government agencies continue to make rules in an effort to curb high fees, banks find a way around them. The best way to protect yourself is to read the “rules” of your account closely and follow it to the letter. In doing so you will keep your cost of banking to a minimum and enjoy more money in your pocket.