Where to keep money for everyday purposes has become a greater issue for consumers in recent years. Years ago almost everyone had a checking account at a local bank.
But now, with banks charging fees for checking accounts, or requiring large balances to avoid fees, consumers who want to prevent the constant erosion of their money have to look long and hard for what we used to know as “free checking.” Many have bailed out of the banking system all together.
Why do so many financial institutions now charge fees for the privilege of having a checking account? The answer has to do with the way banks made money in the past and the way they do now.
In the past, almost all of a bank's profits came from the spread between what they paid for money and what they charged for it. They might pay their depositors two percent interest but charged borrowers six percent. The spread, four percent, was profit.
But since the financial crisis, banks have relied less on lending money because it entails risk. What if the borrower can't pay it back? Fees, on the other hand, entail no risk.
Banks rarely pay interest on checking deposits because that money is more liquid. The bank has less flexibility in lending money from checking deposits because account holders can write checks on it at any time. Since a certain amount of checking deposits must remain in the bank's reserves, the bank can't make money on it – hence, the fee.
Some banks offer free checking but require a certain minimum balance. A consumer needs to know what type and how much before deciding whether it's a worthwhile price to pay for free checking.
What the fine print means
For example, if the fine print says “minimum balance $500,” it means that at no time during the statement cycle can the balance fall below $500 without a fee be assessed.
Some banks require a “minimum daily balance,” meaning you can dip below the minimum during a given day as long as the total is above the minimum at the end of the day. This is very tricky to manage, however, as a bank might not post a deposit when you think it will.
A “minimum combined balance” gives the consumer a bit more flexibility. If you have multiple accounts, the minimum is based on the total amount you keep in the bank. This can be useful if you have a savings account from which you rarely take money.
Another way to deal with a minimum balance requirement is to keep a portion of your savings in the account. Suppose you have $1,000 in a savings account that earns a paltry 0.5% interest – $4.16 a month.
Now suppose you closed your savings account and kept your $1,000 in your checking account, but didn't spend it. If, in a given month you spent all the money in your checking account but didn't tap into $1,000 you would stay well above the minimum balance requirement and thus, would save the $5 monthly fee. That more than makes up for any loss of interest.
But maybe you don't want to go through those contortions – you simply want an old fashioned “free checking” account that was once standard in the industry. Do they still exist? They do, but you have to look a little harder.
Forget about looking at a large national bank or even a regional bank. They are almost certainly to offer fee-based checking with minimum balance requirements. If you live in a small town a locally-owned bank might still have free checking and, if you live in an urban or suburban area, a credit union may offer what you're looking for.
In its 2013 survey, Bankrate.com found that 72% of the 50 largest credit unions in the U.S. offer free, no strings attached checking accounts. Only 39% of banks had similar offers.
The survey found that 96% of the credit union checking accounts in the survey are free or can become free with direct deposit, e-statements, transaction activity, other accounts/balances or some combination. Since 2010, the availability of standalone free checking at credit unions has declined much more slowly than at banks, probably because unlike banks, credit unions are non-profit membership cooperatives.
"While banks have significantly scaled back free checking accounts, free checking remains the rule, rather than the exception, among credit unions," said Greg McBride, Bankrate.com's senior financial analyst.
As an example, the Virginia Credit Union offers a basic free checking account that includes no minimum balance, no monthly service charge and no limit on the number of checks you can write in a given month. As a bonus, it pays up to $8 a month in refunds of fees you pay other banks to use their ATM.
What to do
You can't just walk into a credit union and open an account, however, you must “join.” There are membership criteria for each individual credit union and these criteria are so broad it is almost a certainty that you can find a credit union that will accept your application.