Having a checking account has become a rite of passage in our society - in fact, it's pretty hard to get by without one. When you open your first account, there are some things that you should know. In this article, we'll provide a buyer's guide and owner's manual that you can use to set up and manage your first checking account.
There are things that banks won't widely advertise to people who aren't reading the fine print themselves - particularly in the realm of contingent fees like overdrafts.
If you write a check or make a purchase for more than you have in your checking account, your bank may cover the difference. This is called overdraft. In fact, if you get down to it and look at your bank's policies regarding overdraft fees, you might be a little surprised at the way they do business.
What many banks don't tell customers is that they'll charge you for each transaction that causes your account to use an overdraft. For example, if you have a $50 account balance and you make purchases (using your debit card, for instance) of $25, $25 and $53, you will be charged the - usually hefty - overdraft fee for the purchase that overdrew your account, as well as for each subsequent purchase after you are already in the red.
This is where many banks really get crafty. In the example above in which you made three purchase of $25, $25 and $53, you wouldn't just be charged a fee for the last purchase. Per account holder agreement, many banks have provisions stating that in the event of an overdraft, transactions will be grouped in the order of their size, regardless of the chronological order in which they occurred in. This means that the bank would group those transactions in the order of $53, $25, $25, charging a fee for each of the three transactions on the day you overdrew your account. Furthermore, if your account remains overdrawn, your bank may also charge you daily interest on the loan.
While there is a practical reason for clearing a larger payment before smaller payments (many important bills and debt payments such as car and mortgage payments are usually in large denominations; the rationale is that is better to have those payments cleared first), fees/service charges are also an extremely lucrative income generator for banks.
While banks are traditionally thought of as generating income from the interest they charge customers to borrow money, service charges were created as a way to generate income from those whose accounts weren't generating enough interest revenue to cover the bank's expenses. In today's computer-driven world, it costs a bank pretty much the same amount to maintain an account with a $10 balance as it does an account with a $2,000 balance. The difference is that while the larger account is earning enough interest for the bank to earn some income, the $10 account is costing the bank more than it's bringing in.
So what's a bank to do? The bank makes up for this shortfall by charging fees when customers fail to maintain a minimum balance, overdraw an account or write too many checks.
Even with all those fees, there may still be a way to get out. If you're a customer of a large bank (not a small-town savings and loan branch), the best way to avoid paying non-recurring fees is to ask politely. Surprising as it sounds, customer service reps at large banks are often authorized to overturn hundreds of dollars in charges if you only explain the situation and ask them to cancel them. Just be aware that these "courtesy cancellations" are usually one-time deals that you won't be able to take advantage of again.
Direct Deposit and Free Accounts
For those who use it, direct deposit is great feature that checking accounts provide. This allows your employer to electronically deposit your paycheck into your bank account. However, your bank may appreciate this handy feature even more than you do. For a bank, nothing's better than having a steady flow of income to lend to customers. With direct deposit, banks can count on your account not sitting dormant for the next six months. Because of this, many banks will give you free checking (i.e. no minimum balance or monthly maintenance fees) if you get direct deposit for your account.
Additionally, some banks may offer you a special free checking account as a college student that will remain free until you graduate. Student checking accounts typically offer a lot of nice features in the hope that you'll be enticed to remain a customer when you get a job in the real world. They're definitely something to ask your bank about.
Electronic Funds Transfer
When you're away from home and in a financial bind, getting some financial help from your parents can be a waiting game. With electronic funds transfer (EFT), it's possible to have the money directly transferred into your account without having to wait for a check to come in the mail. Because most banks no longer charge to make an EFT, it's one of the best choices for when your funds run low.
ATMs are a great convenience when you need cash from your bank after hours, but it's important to be aware of fees that may be associated with their use. While you're typically in the clear when you use one of your own bank's ATMs, using an ATM from another bank could result in surcharges of a few bucks from both the bank that owns the ATM, and your bank. Make sure to check out your bank's policy on using third-party ATMs to avoid being charged $5 just to get your hands on your own cash. Also keep an eye out for surcharge-free ATMs, which are becoming increasingly available means of getting your cash fee-free. (For related reading, see Credit, Debit And Charge: Sizing Up The Cards In Your Wallet.)
The debit card is becoming a staple for anyone who uses a checking account. It provides the ease of use and portability of a major credit card without the burden of high interest credit card bills. Not carrying cash can make your life a lot easier and more secure. With many banks offering zero-liability fraud protection for debit cards, not having to worry quite as much about identity theft or a lost wallet is also a nice luxury. Once again, it's not yet a universal thing, so checking on your bank's specific fraud liability policies could save quite a bit of stress (and money) in the future. (For more insight, read Identity Theft: How To Avoid It and Identity Theft: What To Do If It Happens.)
Reconciling a bank account is the only way to make sure that you're not being shortchanged, or worse - taken advantage of. It will usually only take a couple of minutes to reconcile a simple account. Doing this requires only one additional step when you make a purchase - write it down! It's not a time consuming or complex process; you simply subtract purchases and add deposits to your balance. As tempting as it may be to just write a check or swipe your card without pulling out that little bank journal, it's a small habit that could prove invaluable in the future. There's also one additional step at the end of each month: reconciling your account. This can be done with a simple equation:
- Service Charges
- Deposits Not Yet Posted
+ Outstanding Checks
Reconciled Balance per Bank
If this balance matches the balance the bank provides, your account should be in pretty good shape.
Checking accounts are necessary in today's world. With changes in banking like debit cards and electronic funds transfers, checking accounts are one of most useful - and often used - customer accounts. Even so, the labyrinth of fees and policies that your bank's account agreement sets forth can be a tricky one to navigate. Hopefully, with this owner's manual, you'll feel a little more confident about your first checking account.
For related reading, see Are Your Bank Deposits Insured?