Free Checking Account: Just How Free Is It?

Just about everyone needs a checking account when they reach adulthood. And free checking accounts seem to be everyone’s preference because of its perceived “no strings attached” feature. There are no monthly charges and no minimum maintaining balance required. You can keep your balance as low as you like without incurring penalty fees. However, is the free checking account really free? Many people seem to think it is but if when you analyze it deeper, it would appear that “free” checking accounts are not so free after all.

What Makes a Checking Account "Free"

The Truth in Savings Act requires that for an account to be considered “free”, it should not require any minimum balance, maintenance fees, and activity fees.

The maintenance fee often comes in the form of monthly service charges if your outstanding balance dips below a certain level. The activity fee is the charge for writing more checks that what is specified for certain month. Free checking accounts do meet these requirements. Sounds perfect, right? It does come at a price.

Watch for requirements to waive fees

Despite the benefits of free checking accounts, it isn’t for everyone. Most free checking accounts don’t pay interest, and almost every bank imposes stipulations. Try to open a free checking account in certain banks, and you’ll discover that you have a withdrawal limit of $300 a day on an ATM. Meanwhile, other banks may require regular deposits before they allow you to open an account. For example, banks may ask that paychecks or government checks be direct-deposited to the checking account in order to waive any monthly fees.

It is also important for you to be aware that “free” doesn’t necessarily mean that no other fees can be charged. Some fees that the banks can legally charge you include nonsufficient funds (NSF), check printing, stopping payment, dormancy, and closing fees. Some charges may surprise you. If you expect to pay service fees on a regular basis, a checking account with fee-friendly policies may be the better choice.

Advantages of Free Checking Accounts Over Regular Accounts

Regular Checking Accounts

It’s great to earn interest for the money in a checking account, but there is a trade-off. Interest-bearing accounts traditionally require account holders to have hefty minimum balances in order to acquire an interest. And banks require an even higher minimum balance for consumers to avoid monthly service fees. Paying off just a single monthly service fee in that year can wipe out all the interest accrued for that year. This is because the interest rates offered in checking accounts can be considered minuscule.

Free Checking Accounts

For some individuals, free checking accounts are the best option. This type of account typically requires no minimum deposit and it has no monthly service fees. The average minimum required to open the free checking account is $82.71. The monthly average balance that helps consumers avoid fees is pegged a $109.26. 

The Real Costs of “Free” Checking Accounts

While free checking accounts offer some benefits, there is an opportunity cost associated with opening a free checking account. By accruing less interest on money than what is possible, consumers are actually paying the real cost of using free checking accounts. You should ask yourself why banks aren’t going broke from providing this free service.

Some of the country’s biggest banks are making plenty of profits by offering these “free” services. Between the missed interest and NSF fees, dormancy fees, stopping payment fees, check printing fees, and other types of fees, free checking accounts are costing customers a lot of money.

Your money could grow faster in savings

Individuals who maintain an average monthly balance of even $1,500 on their free checking accounts should consider investing this money instead. This is because maintaining $1,500 in free checking every month simply isn’t practical. If you put $1,500 in a high-yield savings account, for example, you could earn interest on your money.

Who Should Open Free Checking Accounts

If consumers had been satisfied with the rates and conditions associated with regular checking accounts, other types of services such as the free checking accounts would not have been available in banking establishments. Free checking accounts had been invented for a reason. It offers low-income individuals or businessmen who want to keep their costs low, an opportunity to experience the benefits of a checking account with fees at a minimum.

If individuals who have high balances on their checking accounts enjoy the advantages of high-interest payments on regular checking account, then those with low balances should go the opposite direction for the same reason. They should open free checking accounts instead of regular checking accounts.

They won’t be losing any money from the “opportunity cost” of putting significant amounts of cash in a non-interest earning account. Instead, they can avoid fees associated with having regular checking accounts. In addition, they won’t be required to maintain a minimum balance on these accounts so there is less pressure to keep up the cash flow.

Where to Open Free Checking Accounts

Most individuals open their free checking accounts based on considerations such as proximity, a number of ATMs, and national prominence. But if you want to get the best deal on your free checking account, none of these should matter.

Big national banks may have branches on all corners of the country but they are also the banks that “get” the most money from their clients. These national financial institutions know that a lot of clients will still opt for their services because of their perceived stability and reputation. To get the best terms and conditions for your money, you should look elsewhere. Try looking into alternatives such as credit unions, online banks, and local banks. You’ll be surprised by some benefits these establishments offer.