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Checking vs. saving account: How to choose

At a glance:

Choosing a savings or checking account at a bank or credit union should be done with about the same care as choosing a stock investment or other asset.

Many consumers don't give much thought to what to consider, thinking that bank accounts are too alike to warrant careful thought. But when you consider that you could miss a lot of opportunities here or there, perhaps a few hours of evaluating banks doesn't seem so pointless after all.

Understand where you're putting your money. (Photo: ANWAR AMRO/AFP via Getty Images)
Understand where you're putting your money. (Photo: ANWAR AMRO/AFP via Getty Images)

How to evaluate banks and credit unions

What parts of the banking experience are most important to you? To some people, customer service and convenience are everything. To others, saving money on fees is everything. Still others care mostly about the reputation of the institution, while others are motivated most by the services that it offers. Everyone is different.

If you haven't given it much thought, consider evaluating your own bank or credit union and asking yourself whether it is what you really want. If you do not have one, then look at the features and services listed below and ask yourself which of them matter most to you.

Features

Here are the typical features considered:

  • Convenience. Are there branches near you? Is there online access? Online bill pay? Do the hours fit your schedule?

  • Interest or dividend rate. One of the most considered features is what you can expect to earn. What interest or dividend rates are being offered? (Interest is paid on bank accounts, while dividends are paid on credit union accounts). Because credit unions are non-profit, they often can afford to pay slightly higher rates than banks. Look for the "annual percentage yield," which takes compounding of earnings into account.

  • Limits. What limits are imposed on your account? Is the number of transactions limited, for example? Do you have to wait a certain length of time before you can withdraw your funds after you've deposited them?

  • FDIC or NCUA membership. If a bank is a member of the Federal Deposit Insurance Corporation, or if a credit union is a member of the National Credit Union Association, your savings will be insured for up to $250,000.

  • Bank size. Larger banks tend to offer more services and options, while smaller banks tend to offer (as a general rule) more attentive customer service.

  • Minimum deposit. What is the minimum deposit required to open an account?

  • Fees. Fees are often the make-or-break feature of an account. Compare the fees at different institutions.

  • Incentives for keeping other accounts under the same provider.

Services

Generally, the larger institutions offer more services than the smaller ones. They usually have in-house staff to tend to such services as investments and financial planning. Also as a rule, banks offer more services than credit unions, though size may overrule this.

Services include the following (not all institutions offer all of them):

  • Online banking, including online bill paying

  • ATMs

  • Direct deposit

  • Credit cards

  • Debit cards

  • Telephone banking

  • Canceled checks

  • Loans, including mortgages, business loans, and auto loans

  • Overdraft protection

  • Investments—stocks, bonds, mutual funds, money markets, etc.

  • Foreign currencies

  • Financial planning services

  • Financial planning software and budgeting tools

  • Estate planning services

  • Retirement accounts

  • Retirement planning services

  • Health savings accounts

  • Business accounts

  • Business services

  • Variations on existing accounts (e.g., vacation savings accounts)

  • Money markets

  • Copies of previous monthly statements

  • Traveler's checks

  • Mortgage refinancing

  • Safe deposit boxes

  • Cashier's checks

  • Money orders

  • Wire transfers

  • Educational programs

  • Automatic savings and investment options

Get to know the fees

Fees are often the big bone of contention among bank and credit union customers that causes them to angrily part ways. Some fees seem unreasonably high or just plain ridiculous to many people. They can total in the hundreds of dollars every year, too.

But they have purposes: to pay for the services being offered or to make up for lost earnings elsewhere. Generally, credit unions have the advantage over banks when it comes to fees, because they are nonprofit and therefore can plow their earnings back into their business, thereby reducing fees and offering a higher dividend rate.

Let's look at the most common fees charged and how you can work with them:

  • Maintenance fees. These are periodic fees (usually monthly) that compensate the institution for the services it provides. Not all accounts charge them; some of those that do charge them may waive the fees if, for example, you use direct deposit for your paychecks. Fees are generally understandable, but compare them to other banks or credit unions to make sure they are competitive.

  • Low-balance penalty fees. This is a fee levied on you if your balance falls below a certain amount. It is therefore an incentive to keep your balance high, which is a benefit to the institution. How it is calculated may be important to you: is it based on your average daily balance, the balance on a certain day of the month, or the lowest balance during the month? Depending on the method used, you may be able to dip below the required amount at various times and still avoid the fee.

  • ATM fees. There are several possible charges related to automated teller machines. You may be charged a fee to use your institution's ATM; there's a strong chance you'll be charged to use the ATMs belonging to other institutions. On top of that, if you lose your ATM card, you may be charged for a replacement card. You can get around ATM fees by taking out larger withdrawals when you visit your branch, and also by taking out extra from a debit card when you make purchases with it.

  • Bounced check fees. If you write a check and don't have enough funds in your checking account to cover it, you will have an overdraft and will likely be charged an insufficient funds fee (bounced check fee, in other words). You can avoid these by being careful with your checking and/or by getting overdraft protection.

  • Returned check fees. If someone writes you a bad check that you deposit, you may be charged.

  • Overdraft protection fees. Overdraft protection lets you write checks when you don't have enough funds in your account to cover them. There may be a fee for this, which will be less than the bounced check fee, and there may also be an interest charge, because overdraft protection is essentially a loan given to you until your balance gets out of the negative.

  • Check printing fees. If you want your bank or credit union to print checks for you, there will be a fee. This fee may be waived if you are new, if you have a high minimum balance on your account, or if you belong to certain preferred groups such as senior citizens. Alternatively, check printing fees are often much less at professional check printers.

  • Per-check charges. If your institution limits you to a certain number of checks per month, you will be charged fees if you write more than the limit.

  • Cancelled check return fees. If you want cancelled checks but they are not normally provided, you can often get them for a fee.

  • Closed account. If you close an account early that you agreed to keep open for a certain length of time, there may be a fee for closing it.

Ask yourself some questions about these fees

If you are not careful or strategic with your account, you could rack up a lot of expenses. Take a running total of your expenses for the past month and multiply them by 12 to see how much you are paying in expenses. If the total is in the hundreds of dollars, do a mental cost-benefit analysis and determine for yourself whether the fees are worth what you are getting.

Has your bank or credit union met your expectations throughout the year? Is it offering what you really want and need? Do you see other uses for that fee money, or is it justified for you?

If you haven't yet opened an account for yourself, be aware of all these fees and be aware that they can take a large bite out of your account balance if you are not careful.

Consider these questions as you look at the fees you are paying. If you don't like them, you might consider switching to a different institution or changing your behaviors to incur fewer fees.

What is a checking account?

Checking accounts offered by banks and credit unions are designed to be used for spending money. They don't make the best savings vehicles for that reason, and many of them do not even pay interest or dividends. That's why many thoughtful consumers don't load their checking accounts with money; they place it elsewhere in order to gather earnings.

However, many consumers don't put enough thought into choosing a checking account, and this can cost them a lot of money and missed opportunities and convenience over the years. What are the most important things to consider when choosing a checking account (beyond the fancy writing, color, and the inspirational message on your checks)? Let's look at a few.

Your habits

Your choice of a checking account should take your checking habits into account. Do you write a lot of checks every month? Then an account with no limit on check-writing might interest you. Do you bounce checks? Then look into overdraft protection; or if you want to learn some discipline, opt out of overdraft protection. Are you comfortable keeping a high balance? Then you might choose an account that offers higher earnings rates if you keep a certain balance. Do you want to minimize fees? Then you will need to be disciplined and avoid behaviors that trigger them, such as falling below a certain balance on your account.

Some accounts charge a monthly service fee no matter how much money you keep in the account. Can you justify this based on the services you are getting from your account?

Southern states are worse at managing their money. (Graphic: David Foster/Cashay)
Southern states are worse at managing their money. (Graphic: David Foster/Cashay)

Earnings rate

Interest or dividends on checking accounts are often available to accounts that agree to keep a high balance. Many banks and credit unions offer higher rates to higher balances as a reward for keeping money available to them to lend out; these accounts typically penalize you if you fall below a required minimum balance. If you cannot keep a high balance, then you may be better off choosing a checking account with no interest or dividends.

If you have a mortgage or other loan at your current institution, or if you have some type of investment there, it may offer you a free checking account.

You can compare rates and fees on checking accounts across the country by going to Websites such as Bankrate.com. As a rule, online banks often provide higher interest rates than traditional banks, because they have less overhead and can thus afford to pay you more.

Fees

Fees are the make-or-break point of many a checking account. There may be account minimum fees that kick in if your balance goes below the minimum, ATM fees for using your institution's ATMs and for using other institutions' ATMS, and of course, overdraft fees. There may even be a fee just for having the checking account. Make sure you are getting the service you want if you decide to accept these fees.

Online checking accounts often charge fewer fees than traditional ones because they have less overhead and can afford to charge you less.

Checking accounts and your financial planning

Beyond paying bills, checking accounts don't figure much in your financial planning. They don't pay enough to help you build wealth, and their fees can subtract from your wealth. Their real power is in paying your expenses conveniently.

  • Consider setting up automatic bill-paying for your recurring bills (phone, electric, etc.) and thereby save on postage costs.

  • Consider using them to pay bills electronically at your discretion.

  • Consider using them as part of an automatic savings plan, where money is taken out on a periodic schedule and put into a savings account or certificate in order to build savings.

  • Consider using them as part of an automatic investing plan, where money is taken out on a periodic schedule and put into an investment in order to build wealth for you.

Your financial institution can help you with these functions if you need help. The onus will be on you to ensure that automatic bill-paying does not deplete your account and rack up overdraft fees.

Online bank accounts: advantages and disadvantages

With the advent of the Internet came online banking, where banks and credit unions offered online access to accounts and the ability to make certain transactions online. Today, millions of us take advantage of these accounts.

As well, there are some banks that are online-only, meaning they do not have physical branches. They typically offer ATM cards, debit and/or credit cards, checking, and some of the more commonly used features of traditional accounts.

Online banks are not for everyone. They have many advantages that have made them very popular, but they are outweighed by a number of disadvantages. Let's look at them a little more.

Advantages

Interest rates. Online banks are known for offering higher interest rates than brick-and-mortar banks. It is not a guarantee, but on average, online banks can afford to pay higher interest rates because there are fewer costs for the bank—no tellers, no office to pay rent on, no utility bills, etc.

Fewer fees. Because online accounts are so much less expensive to maintain, they can charge you fewer fees.

Convenience. You don't need to step out into the rain or snow to get to your bank, nor do you have to drive several miles. Nor do you have to race to the branch before 5 o'clock to see your balance. You can do it all online or over the phone.

Disadvantages

Timing of deposits. When you want to deposit money into an online account, you must do so electronically or by mailing in a check. There will be a time lag as you wait for your funds to become available.

Fund accessibility. Getting your money via a traditional withdrawal can take days, meaning you have to wait for your money.

Fewer features. Saving money on overhead costs comes with its own price—there are fewer options with an online bank.

Customer service. There is something to be said for the human element, which is why many of us go to the teller at a brick-and-mortar institution. You can usually count on getting better problem resolution when the tellers know you. But with an online bank, you can expect little or no customer support.

Technical difficulties. What if your online bank goes down and there's no physical branch to go to? You'll be out of luck, and the phone lines will be jammed with other concerned customers.

Many people reconcile the advantages and disadvantages of online accounts by using both an online institution and a traditional one or by sticking with one institution and using both online and traditional access to it.

Bank accounts for teenagers: The basics

Good financial habits are learned young, and that includes saving and spending money. Parents may find that opening a savings account or checking account for their children teaches them how to handle their own money.

Here are some things for parents to think about:

  • Does your financial institution allow accounts for minors? Checking accounts are the issue here, as some institutions don't allow them because they require signing a contract. A parent would therefore need to cosign on an account and become the co-owner of it along with the teen.

  • Is your teen already financially responsible? If so, a savings or checking account may be an obvious choice.

  • Does your teen work? A working teen might benefit from a savings or checking account. If there is none, any paychecks earned would need to be cashed, and that can discourage saving.

  • Does your teen pay any bills? Some teens contribute toward car insurance, groceries, and other periodic expenses. Not only can a checking account help them pay these bills, but it leaves behind a payment history that reflects on them. This can benefit them if they want to get a credit card there in the future.

  • Do you want your teen to have an ATM or debit card? Are they responsible with their own money so that they don't drain their account quickly?

  • Is your teen saving for a car, college, or some other goal? If he or she is, a savings account can be ideal for keeping money stashed away.

  • If you've decided to open a checking account for your teen, what options do you want? An account with a low (or no) minimum balance requirement might be best suited for them until they've saved up enough to move to a more advantageous account (which might even pay interest or dividends).

A teenager should learn about all fees that apply to checking accounts, including ATM fees, account minimum fees, and overdraft fees. He or she should learn the pros and cons of overdraft fees. Early exposure to their sting can condition teens to learn good money skills.

Another thing to consider: many banks and credit unions have budgeting software and educational programs for teens who bank with them. Some offer prizes and other incentives to encourage good financial behavior.

Summary of savings vs. checking accounts

Though almost none of us will become rich just by having a bank account, it is an indispensable part of our financial lives.

Many people don't think much about their bank accounts offer until the fees become too high. The various bells and whistles don't matter to most people.

However, it can pay to know a little about what to look for when choosing an account.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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