Being a Smart Banking Consumer: Checking Accounts

Banks are a place for us to handle our checking, savings, and possibly a loan. Beyond that, for many of us banking is a black hole. Why banks do what they do and how they do it is little understood outside of the banking community.

The more information you have, the better consumer you can be.

Being a Smart Banking Consumer

(Part 4): Checking Accounts

This article and the next review the various account types that banks offer their consumers.  We’ll start with checking accounts. Every bank has different names for these accounts, but generally, they are all basically limited to these types:

No Minimum Balance Basic Checking Account

A no minimum balance basic checking account allows you to open an account without depositing any money at the time you open it. After a period ranging from 6 months to a year, banks will close the account if there is still no balance. This type of account typically has no interest earnings. This account may also come with:

1. An ATM Card/Debit Card

ATM cards are also called debit cards. These cards can be used for purchases, with the money taken directly out of your checking account. They are like a credit card, but the amount available is limited to the amount of money you have in your account.

ATM deposits can only be made at your bank’s ATM machine. ATM withdrawals can be made on any ATM. An ATM not belonging to your own bank is called, in bank lingo, a “foreign ATM.” A foreign ATM can be located anywhere in the U.S. or overseas. A word of caution: ATMs at gas stations and other non-bank locations can be compromised and your ATM number and pin stolen. It is best to use ATMs at secure bank locations whenever possible.

If you make a withdrawal at a foreign ATM, you will be charged by both banks— your bank for using a foreign ATM, and the other bank for using their ATM. There are some banks that have agreements with other banks that enable you to use the other banks’ ATM at no additional charge.

2. Overdraft Protection

Overdraft protection allows you to have money available to pay a bill if you overdraw your account. This means that you can pay a bill even if you do not have enough money in your account. Overdraft protection plans are basically a “free” loan that the bank makes to you for a specific purpose.

Each time you overdraw your account, you will be charged an overdraft fee. This fee can be up to or as much as $35 to $50. If you do not deposit money to cover the overdraft after 5 to 10 days, there is an additional daily fee charged, typically of $5 to $10.

There is usually a limit to the amount that is available to use for overdraft protection. For example, banks may have an overdraft protection limit of $300. Further, even if you have overdraft protection, the overdraft fees still apply. In short, all the overdraft protection really does is pay a bill for you that otherwise may not have been paid.

Minimum Balance Checking Accounts

Minimum balance checking accounts require a minimum dollar amount to be in the account each month.  The bank will use a system called the “average daily balance” to calculate whether you have met this minimum. If you have not met the minimum, there is usually a fee charged for each month your account does not meet the minimum required balance.

This calculation is one that takes the end of day balance each day and averages it out by adding each day and then dividing that total by the number of days in the month. Minimum balance accounts usually come with certain perks, such as a free safe deposit box or free cashiers’ checks. Safe deposit boxes and cashiers’ checks both have a fee or charge for customers who do not have a minimum balance checking account.

Interest Checking Accounts

An interest checking account earns interest that the bank will deposit into your account each month. The interest rate is up to the bank. Interest rates on interest checking accounts are usually well below what you could earn on a savings account or most any other investment.  This type of account also has ATM cards and overdraft protection available. Because of the interest earnings, there may be a minimum monthly balance required, as explained earlier in minimum balance checking accounts.  The more money you have in the account, the higher the interest earned each month.

Money Market Accounts

The interest earned by a money market account is higher than the interest earned by a checking account. Money market accounts usually require a minimum balance. Again, the higher the balance in the account the higher the interest earned.

The difference with money market accounts is that you can only make 6 withdrawals a month by check. The government allows banks to pay the higher interest rate on these accounts, but it limits how often the consumer can take money out. These accounts also come with ATM cards, overdraft protection, free safe deposit box, and free cashiers’ checks.

Other issues related to checking accounts

• Dormant Accounts

  Checking accounts that have not been used for a year are called “dormant accounts.” The bank assumes that since you have not used the account for a period of time, that you are not looking at it or have forgotten about it and will set the account up under a special security measure that only allows certain employees to look at the account. This is to avoid theft of your funds by bank employees (which happened all too frequently in the past before this system was set up).
  
  To show use during this three-year period, you can simply access your account by making a deposit or writing a check on the account. You can also use it by signing a letter that the bank will send you indicating that you want the account to remain open for your use. Any of these— a deposit, check, or the letter— tells the bank you are actively looking at your account. If you do not use your account for three years, the money will go the state, and you will have to ask them to get your money back.

• Other Withdrawals

  From your account can happen if you owe the state money. State agencies include those like the department that oversees child welfare payments from a divorced spouse, or the federal government if you owe money for back taxes. These organizations will “levy” your account, that is, request the bank to withdraw funds to meet the amount needed to pay them what you owe.

Coming up in part 5, we’ll take a look at savings accounts.

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