Is Your Free Checking Account Really Free?

Here's a piece courtesy of the e-book Banking Secrets Revealed:

Banks love checking accounts because they are a low-cost source of funds for the bank.  Most banks pay little, if any, interest on their checking deposits.  As a result, the deposits they receive cost them very little as opposed to funds deposited in a certificate of deposit which carry higher interest rates.  These low cost funds are one reason that banks have been able to increase their net-interest margin, the difference between the cost of funds and the interest rate charged when those funds are lent out.  Getting more of these low-cost deposits is one reason why so many banks offer hefty incentives for new checking accounts.  Recently, in the Minneapolis/St. Paul area, a bank was offering new depositors a free Ipod for a new checking account subject to other restrictions.  In other parts of the country, banks are giving as much as $200 to new checking depositors.

One of my pet peeves is the “free” checking account that, when you read the fine print, is anything but free.  Minimum balances, direct deposit requirements or minimum usage requirements are all typically associated with these so-called “free” accounts.  Here are some key questions to ask when inquiring about a bank’s “free” checking offer:

• Is the account “free” for the life of the account or is it just a short-term promotion?
• Are there minimum usage requirements? Do you need to write a minimum number of checks each month?  Will your account be converted to a more traditional, fee-based, checking account if it’s not used in a specified period of time?
• Are there any kind of monthly fees associated with the account?
• Do you need to pay for your new checks?  What does a box of new checks cost?
• Are there fees for doing your banking business in person or over the telephone?  Some banks charge for in-person visits on certain kinds of accounts.
• Do you need to have direct deposit of your paycheck set up to take advantage of the “free” checking?
• Does the bank offer “courtesy” overdraft protection to cover your bounced checks automatically and then charge you for it?  This is just a cover for a high-priced overdraft loan.
• Are there fees to use the bank’s debit card?  Is there a different treatment of debit transactions with a signature versus those using a PIN number?
• Does the bank pay interest on the funds deposited in their “free” checking account?

These are key questions to ask your bank before signing up for their “free” checking offer.  By being well-informed before you go into the bank you stand a much better chance of getting a good deal on your checking account.

FYI: Be sure to enter my drawing for a free book!

Comments

[Blaine Moore]

My new checking account that I recently opened is free but has NO interest. That's right, 0%. And I'm happy with that.

My savings account with them has 5.25% interest guaranteed through the end of the year. So I have a brick and mortar account with online access, a higher interest rate than online banks, and I can transfer (and schedule transfers) to my checking account the same day instead of having to have my money in limbo for 2-4 days.

I'm pretty happy with the arrangement. No minimum balances, no direct deposit required (my direct deposit that I set up actually goes straight to savings), just no interest on the $100 or so I keep in there. Any time I need to write a check out or use bill pay, I transfer the money in that morning.

[tinyhands]

A no-fee, 0% interest checking account is the same as one that charges a 3% annual fee (if you assume that inflation is ~3%).

[rdub]

Try joining a credit union. Most credit unions don't charge any fees for their checking accounts. However, mine require direct deposit in order to get free checks, but there are no fees.

[Kurt]

"A no-fee, 0% interest checking account is the same as one that charges a 3% annual fee (if you assume that inflation is ~3%)."

What?!? No. It has NOTHING to do with inflation. Inflation is a negative factor, but it isn't like you can avoid inflation by paying a checking account fee. Deposit $100 into each of those accounts. In one year, you have $100 in the first one, and $97 in the other. $100>$97.