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How to choose the right 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.

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?

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.

Dive Deeper: Bank accounts 101: The full breakdown

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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