Illustration: Cristi Cash
Budgeting 6 min read

Check It Out

To pay your rent, cover your credit card, cable, and utility bills, buy your groceries, and repay your student loans, you almost certainly need a checking account. It’s the only way to authorize the transfer of funds, whether you do it in writing or handle everything electronically.

Choosing the checking account that’s best for you can be complicated, since accounts come in several varieties. Just look over the product offerings in a couple of banks or scroll through a few bank websites to get a sense of what’s available.

In the Bank

A regular checking account with a conventional or online bank is likely to cost you—unless you can find a way to avoid it. Most banks charge either a monthly fee, a fee for each check or ATM withdrawal, or sometimes a combination of monthly and per-use fees. Charges can range upward from 35 cents per check and $2 or $3 per ATM withdrawal, and flat fees run, on average, from $7.50 to $15 a month.

Some banks may offer free checking and ATM use for a short time to attract your business. And most banks waive their fees if you keep a minimum balance in your checking account or in a combination of accounts in the bank. The catch here is the minimum can seem pretty maximum, though amounts vary. You may also qualify for free checking if your paycheck is deposited directly into your account.

Ask about all the possible combinations to qualify. You can usually count the money in an interest-paying or investment account towards your minimum. Some banks also count your mortgage or other loan balance toward the minimum.

A Scale of Frills

Some banks offer a scaled-down version of their regular checking account, called no-frills or basic checking. If you write only a few checks a month, or no paper checks at all, and you don’t withdraw money very often, it’s something to consider. But for many people, it’s too restrictive—and the fees can be steep if you go over the limits.

At the other end of the scale, some banks offer combined accounts, called relationship accounts, that provide everything but the proverbial kitchen sink: no-fee credit cards, loan discounts, and the like. If the required minimum balance for this kind of account gets you free checking, there’s probably nothing to lose, provided you need enough of the features the account offers.

Word Check

Checking accounts are actually transaction accounts. That means you can authorize the bank to transfer money from your account to another person or organization either by writing a check that includes the words “Pay to the order of” or by electronic transfer. In contrast, a savings account is a non-transaction account and the only things you can do are withdrawals or transfers—electronic or traditional—to another account in your name.

Checking, Credit Union Style

If you’re banking at a credit union—which might sound like a contradiction, but there’s not really any other way to say it—you handle transactions in the same way you do at a bank. But instead of writing checks, you write what are known as share drafts.

The big difference is in the cost. Most credit unions don’t impose fees for checking beyond the modest annual fee for membership, which is sometimes as little as $25. And if they require minimum deposits at all, it’s much more likely to be hundreds rather than thousands of dollars.

Doing Double Duty

One way to manage a minimum balance requirement is to put the money you’ve set aside for your emergency fund in a bank CD or money market account.

The money is safe, which meets one of the basic criteria for an emergency fund. And if you’re ever in serious enough financial trouble to withdraw the money, the potential lost interest or below-minimum fees will probably be the least of your worries.

Weighing In

If you have to maintain a minimum balance to get free checking, you might want to ask yourself a few questions:

  • How many checks or debits will you have, and how often will you use the ATM?
  • Would you make out better by investing the minimum elsewhere and paying the fees for a basic, no-frills account?
  • Should you investigate other banks, credit unions, virtual banks, or non-bank organizations where you could get the same service and convenience at a lower cost?

A New Interest in Checking

Like regular checking, an interest-bearing checking account lets you write as many checks as you want each month and use the bank’s ATMs. The added benefit of these accounts is that you earn interest on your balance at the rate the bank sets, often about the same as you’d earn on a savings account.

So why wouldn’t you choose to earn while you spend? Well, unless you maintain the minimum balance—an amount the bank determines—you not only forfeit the interest but typically owe more—sometimes much more—in fees than you would for a regular account at the same bank. Those fees can kick in for any month your balance drops below the minimum, sometimes even if it’s just for a day or two or just a few dollars.

In most cases, even one month of unexpected fees can outweigh what you could earn in interest over several months. So as great as interest-bearing accounts may sound, you’ll want to figure out if you can earn as much some other way, without the pressure.

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