What does it Offer?
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.
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 may come 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.
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 free checking account.
It is also important for you to be aware that “free” doesn’t necessary 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. A lot of banks provide a debit card together with the free checking account. If you decide to swipe this card for payment, you’ll discover that you can be charged a fee for every transaction.
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 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 possibly wipe out all the interest accrued for that year. This is because the interest rates offered in checking accounts can be considered minuscule.
It has been estimated that the average balance required to open a regular checking account and earn interest is $376.75. But consumers will to need have an average of $3,461.84 on these accounts in order to avoid monthly maintenance fees. If you maintain the $3,461.84 balance or the required minimum in your bank, you’re basically allowing the bank to get a line of credit at your expense.
Interest for these accounts merely amount to 0.24% or even less. In fact, interest rates of between 0.05% and 0.10% are quite common if you open a free checking account on big national banks. Wachovia, for example, requires account holders to have a minimum of $4,000 in their balance just to avoid fees and they pay a mere .05% for interest. Remember that 0.05 is only one-twentieth of a percent and you need to pay a maintenance fee of $20 if you go below the minimum of $4,000.
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 actually costing customers a lot of money.
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 invested $1,500 in the money market for example, you could have earned as much as 20% interest on the same amount. However, as investing isn’t suited for every checking account holder, it is important to be aware of the risks involved in interest-bearing accounts.
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, 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 such as Bank of America, Wells Fargo, and Wachovia 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, internet-based banks, and local banks. You’ll be surprised by some benefits these establishments offer. Consider their free checking account. Credit unions offer higher interest rates and lower monthly maintenance fees if you fall below minimum because of their non-profit status. These establishments also have a friendlier atmosphere and more accommodating personnel. Credit unions usually require a minimum balance of $2,500 in order to waive the monthly fee (usually between $7 and $9) but it will pay 0.25% interest.
You might be wondering, ‘What is so great about 0.25% interest’? While it does appear low and unappealing, if you compare it to the terms of opening a Wachovia free checking account, you’ll begin to see the difference. 0.25% is around five times more than what Wachovia and other big national banks are offering. Credit unions and local banks also have lower monthly minimum requirements and lower monthly maintenance fees. Aside from the monetary benefit, it is also easier to get into contact with “alternative” establishments. You won’t need to wait to be redirected to qualified contact center staff to get answers.
You can also look into internet-based banks. A lot of banks and credit unions already offer online banking services but there are also purely internet-based banks. Theoretically, these establishments offer high interest rates, low maintenance fees, and a wide range of services. A lot of people are still hesitant to take this route but if you decide to go for it, you can check out the MyBankTracker.com’s listing of internet-based banks.
When it comes to banking, there is definitely no free lunch even if the advertisements say otherwise. But by knowing the strings attached to these “free” packages, it becomes possible for you to shop for the best deal possible. Other tips that will help you save money from using free checking services include ordering your checks direct from the printer. Banks will typically charge you $25 for an order of 200 checks but you can get rid of this additional expense by going direct. You should also consider paying your bills online instead of using your check. You will not only be able to conserve more of your checks, you can also save on posting fees if you need to mail it.