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Free Checking Isn't Always Free

25 percent of bank customers pay all the fees

By Mark Huffman
ConsumerAffairs.com

September 2, 2009

Even consumers who sign up for "free" checking are often shocked at the end of the year when they see how much in fees they have paid. It turns out that free checking is free for some, but not free for others.

"FDIC released a study in November 2008 that showed 75 percent of people with checking accounts actually paid no fees," Tim Smith, CEO of Probity Financial Services, told ConsumerAffairs.com.

But the other 25 percent, the study showed, paid minimum balance fees, overdraft fees and other service charges that subsidize free checking for the majority. The fees were part of the $39 billion in service charges the banking industry charges its customers in a typical year.

Banks, it seems, are very dependent on fees to meet profit goals and have become more dependent over the last 20 years.

"In the past banks charged overdraft fees to punish and discourage their customers from overdrawing their accounts," Smith said. "At some point they realized this was a service they could provide and charge for."

Overdraft charges

Claudia, a surgical resident from Los Angeles, is definitely among the 25 percent of bank customers who pays fees. Claudia told ConsumerAffairs.com that she has paid nearly $2,000 in overdraft fees in the last 12 months on her Bank of America checking account, paying $500 in just the last month. How could fees possibly add up like that?

"I have been hit by four to five overdraft charges a month," she told ConsumerAffairs.com. "Usually they are for a $5 coffee or $10 at the grocery. I get charged even if the money was deposited in my account at noon but the coffee was purchased a couple of hours earlier."

So a free checking account is of little value when customers operate close to the balance in their accounts, and slip into the red from time to time. Almost all banks charge an overdraft fee, or a fee of some type.

Smith's firm is an online bank, doing business nationwide, and limits itself to checking accounts. He says his customers don't pay overdraft fees, but they do pay a fee for their checking account.

"Our checking account costs $19.95 a month and is geared to the consumer that needs to avoid unexpected fees and charges," Smith said.

Probity customers don't pay overdraft fees, just the monthly charge, making Probity the "Netflix of banking," Smith says. He says Probity was devised as an alternative for the 25 percent of bank customers who subsidize everyone else.

Many options

Consumers who don't overdraw their accounts may save money by using a free checking account, but should shop carefully and consider all the options. Major banks tend to offer a wide variety of checking products, most of which contain fees of some sort of the other. Even supposedly free checking accounts will charge fees in some cases.

Among its products, Bank of America offers the MyAccess Account, which at the moment, is free if you open it online. Another way to get the account without charge is to have at least one qualifying direct deposit made during the billing cycle, or maintain the required balance of $1,500 in the account. Without meeting those conditions, it's $8.95 a month.

Even then, the account might not be completely fee-free, as the bank's Web site says "other account related service fees still apply."

Wells Fargo's basic checking account costs $5 a month, but the fee is waived if the customers either has one qualifying direct deposit per billing cycle or keeps a minimum of $1000 in the account. Customers pay extra for online bill pay.

Wells Fargo's Custom Management Package checking comes with free bill pay, a free first order of checks and a Gold Check Card. The $8 monthly charge is waived if you keep a balance of $1,000, automatically transfer $25 to savings or have a qualifying direct deposit during each billing cycle.

More flexible

Smaller banks and credit unions are also alternatives when it comes to checking accounts. Often, their requirements for a free checking account are less stringent and more straightforward than large banks'.

For example, the Redding Bank of Commerce, in Redding, Calif., has a product called Forever Free Checking, offering free checks, a free debit card, free online banking and free bill pay. The account requires a minimum opening deposit of at least $25.

Bank of the Sierra, which also serves a number of small and medium sized California markets, has a free checking account with no per check charge, unlimited check writing, free eStatements, a free check card and free online banking and bill pay.

As long as you don't need to physically visit a bank to deposit cash, small banks located in other areas of your state might be a good alternative. But keep in mind, just about every bank will require you to accept their "courtesy" overdraft protection that will cover your purchase if you overdraw your account, and impose a fee of around $30 or more.

Another free checking account alternative is a credit union. Mid-Atlantic Federal Credit Union, serving the Washington, D.C. area, provides both free checking and interest checking products. There is no minimum balance requirement or monthly maintenance fees and customers get free bill pay, two foreign ATM transactions per month, and 50 free checks.

Interest checking at Mid-Atlantic Credit Union pays a floating interest rate on balances, but requires a $5,000 minimum balance and charges $10 per billing cycle when you fall below it. However, customers can avoid the fee if they have at least one qualifying direct deposit per cycle.

Consider the potentials

Free checking accounts may not be for everyone. Because they are free, they usually don't include some taken-for-granted services like free stop payments and canceled check return. However, if you need those services at some point, they are usually available for a fee.

Before selecting a checking account, its smart to consider what your needs are, and what the potential fees are. If you tend to get hit with a lot of overdraft charges, you may be better off paying for checking but using a service that either provides free overdraft protection or doesn't allow you to overdraw your account.

If you never pay an overdraft fee, on the other hand, look for the best deal on free checking.

"When you open an account, a bank is required to give you a list of all their fees," Smith said. "Consumers should read it closely and choose a bank and a product that best fits their needs."

What are some things to look for? To make sure you're getting a good deal on a "free" checking account it should include:

• No Low Balance Fees

• Free debit or check card

• No charge for ACH and direct deposit transactions

• Free online access to your account

• Unlimited monthly check-writing

• No minimum check-writing amount

Before signing up for any checking account, make sure you fully understand the terms and have identified the fees you'll be likely to pay. By doing a little research, you can avoid being part of the 25 percent of checking account customers who subsidize the rest.

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