Choosing a financial institution to look after your money is one of the most important financial decisions you can make. Different banks offer widely different levels of service, charge different levels of fees, and will pay you significantly different amounts of interest on your money.
In practice, this means that choosing the best bank for you is rarely a one-off process. The best bank for you will likely change throughout your lifetime, as your financial and investment goals evolve. For that reason, one piece of useful advice is to remember that there is no limit to the number of bank accounts you can hold, nor how frequently you swap one bank for another.
Diversifying your bank accounts—just as you do your investments—can allow you to get the most from your money. In this guide, we’ll look at the three most important factors in choosing a bank for checking and savings accounts: the type of bank, the rates and fees it charges, and the extra features it offers.
- There are three main types of financial institution that can reasonably be referred to as a bank: traditional brick-and-mortar banks, online banks, and credit unions.
- Take a look beyond all the marketing hype, and you’ll see that most bank accounts can be distinguished by the fees they charge and the interest rates they pay.
- Peace of mind is arguably the most important service offered by any bank and should be an important part of your choice.
Types of Banks
The first and most fundamental factor in choosing a bank is the type of institution that is right for you. There are at least three distinct types of financial institution, each offering a unique set of advantages and disadvantages, that can reasonably be referred to as a bank.
Traditional banks are what most people think of when they think of a bank. These banks offer services to their customers largely through a network of brick-and-mortar offices and provide ATMs to both their own customers and those of other banks. Many have also started offering online banking services for paying bills and making deposits.
Although these banks have been around the longest, today there are fewer reasons to choose a traditional bank over its online competitors or credit unions. As we’ll see, both of these institutions offer lower fees than traditional banks.
That said, you may prefer to do your banking in person. If you have a question or a problem, you can go into your local branch and talk to someone about it. This could make a traditional bank the right choice for you. But it’s still worthwhile checking out the other options that are available to you.
If you choose a traditional or online bank, be sure to select one that is insured by the Federal Deposit Insurance Corporation (FDIC), which covers $250,000 for each depositor, per account category.
Online banks were relatively rare 20 years ago, but their popularity has grown over time, making them direct competitors for traditional banks today. Because online banks have fewer or no physical branches, their overhead costs are far lower than those of traditional banks and that means their fees are typically far lower, too.
That said, many people find the customer services offered by purely online banks frustrating. The industry is aware of this. The best online banks now offer extensive customer support options, but you still won’t be able to walk into a branch to talk to a bank employee in person.
In recent years the dividing line between online banks and traditional banks has become increasingly blurred, as the digital services and tools offered by the latter have become more advanced. This means that it may be possible to get the advantages of a traditional branch while still accessing the convenience of digital banking.
Credit unions are often overlooked as an alternative to traditional and online banks, but they have advantages that can make them a good choice.
First, credit unions are not-for-profit financial cooperatives. That means they are member-owned, so profits are returned to their members via lower fees and higher interest rates on deposit accounts. By contrast, publicly-owned traditional banks must meet revenue goals and are beholden to shareholders.
And second, most credit unions maintain genuine relationships with their local communities. If you want a bank that gives something back to your community, a credit union may be the natural choice for you.
However, credit unions can have fairly stringent rules for members to access services, and not all of them offer features like online banking. This may make one a less-than-optimal choice for a checking account that you need to access and work with on a regular basis.
If you opt to bank with a credit union, make sure that it has been insured by the National Credit Union Administration (NCUA). Like the FDIC, it insures up to $250,000 for each depositor annually.
Fees and Interest Rates
The next factor to consider in choosing where to bank is an institution's fees and the interest rates it offers. Most people will have two basic accounts: a checking account and a savings account. The features you need for each type of account will vary, and very often it makes sense to have these accounts at different institutions.
Fees to be aware of
Most banks will charge a monthly fee to maintain a checking account, but these fees can vary widely. And a bank may waive or lower them if you meet certain criteria, such as meeting and maintaining a minimum balance requirement or setting up direct deposit for your paychecks.
To keep these fees to a minimum it's important to understand what a bank will actually charge you for using a checking account. Ask about its common charges, which may include:
- Monthly maintenance fees
- Overdraft fees
- Statement fees
- Stop payment fees
- Returned check fees
- Wire transfer fees
- Cashier’s check fees
- Certified check fees
- Out-of-network ATM fees
Fees are by far the largest distinguishing factor among checking accounts. All else being equal, you should choose the checking account with the lowest charges.
For your savings account look for a different set of features. You shouldn't need to access a savings account as frequently as a checking account, so it’s unlikely that you will need app or online banking services. And as long as you don't make frequent withdrawals, most savings accounts don’t come with high fees.
Instead, the primary way that these deposit accounts differ is in the interest rates they pay. These can vary widely, and the best rates are often those offered by credit unions or online banks. Shop around to find the best interest rate for your savings.
The two factors we’ve considered so far—the type of institution you choose and the amount it will cost you in fees or lost interest—are the most fundamental aspects of choosing a bank. However, most banks will also offer a range of other services, discounts, or features that may be crucial for you.
Since everyone’s needs are different, take some time to think about how you use the accounts you currently have and where you are losing money in fees or time. Then look for a bank that's a better fit. Important factors might include:
- Online and app-based banking. Most banks now offer these options. If you are using your account a lot—particularly for setting up new payments or managing standing orders—a full-feature online service can save you a lot of time.
- Local branches and ATMs. Even if you deal with your bank primarily online, there may still be times when it's easier to visit a branch. For many people, having a local bank branch—at least for their checking account—is a must. Similarly, a network of ATM machines may be important to you—say, if you travel frequently and need ready access to cash while on the road.
- Security. Though most banks are insured against loss, they still vary when it comes to the level of security they offer for online services. A quick scan of the news to see which banks have recently experienced security breaches may help you rule out a bank in this regard.
This last point is related to another—that ultimately, the bank you choose should be one you trust. Many people still make their bank decision based on the company that their parents bank with, or merely because they trust the name and reputation of a large national bank. There is nothing wrong with that—peace of mind is arguably the most important service offered by any bank, and should be part of your decision-making process.
The Bottom Line
The best way to choose a bank can be summed up pretty easily. A good bank is one that:
- Gives you easy access to your money.
- Doesn’t charge exorbitant fees.
- Offers a good interest rate on your savings.
- Has great online and app-based banking services.
- Provides excellent customer service.
- You trust with your money.
So make a list, rank some options against these criteria, and see which bank or credit union comes out on top. Just remember—you can always change your mind later or open a second account if your first choice ends up not being optimal for you.