What type of account should you keep your money in at a bank or savings and loan association? How can you find the account that will charge you the least amount of money for the services you need? This Financial Guide helps you choose the most cost-effective type of account.
Bank accounts are a basic part of managing your money and nearly everyone has a bank account of some sort, whether it’s a checking, savings, or money market account. Features and costs of accounts can vary greatly among institutions, so it is important to shop around when looking for a new account. You should also ask questions and negotiate fees and services with your current account. You may discover that you do not need to pay many of the fees you are currently paying. This Financial Guide discusses the various types of bank accounts, and provides suggestions for finding the lowest-cost account that will provide you with the services you want. In addition, it tells you what you need to know about Electronic Funds Transfers – how to get the best use from ATM cards, pre-authorized transfers, and point-of-service payments.
The accounts offered by depository institutions generally fall within one of these types:
With a checking account you write checks to withdraw your deposited funds from the account. Checking accounts provide you with quick, convenient and frequent access to your money. You can make deposits as often as you like. Most institutions provide customers with access to an automated teller machine (ATM) for banking transactions or debit features for purchases at stores.
Some checking accounts pay interest; others do not. A regular checking account -usually called a demand deposit account-does not pay interest, while a negotiable order of withdrawal (NOW) account-does.
Various fees are charged on checking accounts. You generally must pay for the printing of your checks. Other fees vary among institutions. Some charge a maintenance or flat monthly fee regardless of the balance in your account. Other institutions charge a monthly fee if the minimum balance in your account drops below a certain amount any day during the month or if the average balance for the month drops below the specified amount. Some charge a fee for every transaction, such as for each check you write or for each withdrawal you make at an ATM. Many institutions impose a combination of these fees.
Tip: Interest-bearing checking accounts may appear attractive, but they often charge higher fees than regular checking accounts; the fees often negate the interest. It’s important to find out how much you’ll be paying in fees.
A money market deposit account (MMDA ) is an interest-bearing account that allows you to write checks. An MMDA usually pays a higher rate of interest than a checking or savings account. MMDAs usually require a higher minimum balance to start earning interest, and often pay higher rates of interest for higher balances.
Making withdrawals from an MMDA is less convenient than withdrawing from a checking account. You are generally limited to six transfers per month to another account or to other parties, and only three of these can be by check. Most institutions charge fees with MMDAs.
With savings accounts you can make withdrawals, but you do not have the flexibility of checks. As with an MMDA, the number of withdrawals or transfers per month may be limited.
Many banks offer more than one type of savings account-for example, passbook savings and statement savings. With passbook savings you get a record book in which deposits and withdrawals are entered; this record book must be presented when making deposits and withdrawals. With statement savings, the bank mails you a regular statement showing withdrawals and deposits. As with other accounts, various fees, such as minimum balance fees, may be charged on savings accounts.
Credit union accounts are similar to those at banks, but have different names. Credit union members have share draft (rather than checking) accounts, share (rather than savings) accounts, and share certificate (rather than certificate of deposit) accounts.
Tip: Credit unions typically charge less for banking services than banks. In order to use a credit union you generally must be a member of a group, such as through your employer or a family member’s employer. Check local credit unions and find out their membership requirements. You can contact the National Credit Union Administration for information on credit unions. Similarly, you can obtain information, including financial data on federally insured banks through the FDIC.
Planning Aid: Please see National Credit Union Administration, which regulate and insures credit unions.
Planning Aid: Please see, Rates for Savings and CDs. This site provides current savings and CD rates.
Certificates of deposit, or CDs, are time deposits. CDs offer a guaranteed rate of interest for a specified term, such as one year. With CDs, you can choose from among various lengths of time that your money is on deposit, ranging from several days to several years.
Once you pick the term you want, you will generally have to keep your money in the account until the term ends. Some banks allow you to withdraw the interest earned while leaving your initial deposit (the principal) in the CD. Because you are leaving your funds with the bank for a set period of time, the rate of interest is generally higher than for a savings or other account. Typically, the longer the term, the higher the annual percentage yield.
If you withdraw your principal before maturity, a penalty is usually charged. Penalties vary among institutions, and can be hefty-sometimes greater than the interest earned, eating into your principal. The bank will notify you before the maturity date for most CDs. Often CDs renew automatically.
Tip: If you are going to take out your money at maturity, keep track of the maturity date and notify the institution that you wish to take out your money. Otherwise the CD will roll over for another term.
Basic or no-frill accounts, which may be offered by some banks, give you limited services for a lower price. Basic accounts give you a convenient way to pay bills and cash checks for less than you might pay without any account at all. Basic accounts are checking accounts, but the number of checks you can write and the number of deposits and withdrawals you can make is limited. Interest generally is not paid.
Tip: Compare basic and regular checking accounts, taking into account your check-writing needs, to get the best deal in low fees or low minimum balance requirements. If you don’t write many checks and don’t want to keep a minimum balance in the checking account, the basic account may be worth your while.
The table below summarizes the available account types and their features:
Type Of Account
|Money Market Deposit Account (MMDA)||Yes, usually higher than NOW or savings||Yes, usually with a monthly limit||Yes, usually with a monthly limit||Yes|
|Savings||Yes||No||Same as MMDA||Yes|
|Certificate of Deposit (CD)||Yes, usually higher than MMDA||No||Yes, usually no withdrawals of principal until date of maturity||Yes, if you withdraw principal funds before date of maturity|
Note: These are the general rules at the time of this writing. They may vary from bank to bank and from time to time.
What type of account should you open? The answer depends on how you plan to use the account. If you want to build up your savings and you won’t need your money soon, a certificate of deposit will serve your purposes.
If you need to reach your money easily, however, a savings account may be a better choice. And if you want a way to pay bills, a checking account is probably best for you.
Tip: If you usually write only two or three checks per month, an MMDA might be a better deal than a checking account. MMDAs pay a higher rate of interest than checking accounts, but require a higher minimum balance.
Checking accounts have other advantages. They simplify your record keeping. Canceled checks provide you with receipts at tax time, and the check register is a convenient way of keeping track of monthly expenses.
Account features and fees vary from one institution to the next. It’s important to take the time to ask bank employees about any account features and fees before you open an account.
Tip: To get the most out of a checking account, find out what the minimum balance for avoiding fees is, and keep that minimum in the account. Further, try to get a checking account that will pay you interest, or that looks to the combined balance in checking and savings accounts to arrive at the minimum required balance. This way, you will not be paying the bank for the checking services, and your money will be earning some interest-although not at a great rate.
Choosing an account is a matter of comparing the features of accounts at various banks. The features that should be compared are interest, fees, limitations on withdrawals, and limitations on time deposit accounts.
Determine the interest rate on an account. Find out whether the institution can change the rate after you open the account. In addition, find out the following.
Tip: Find out how the bank calculates the minimum balance requirement. A calculation that is based on the minimum daily balance is best for you.
Planning Aid: See Money Market Accounts. This site provides information on current money market rates.
Planning Aid: See Savings Accounts. This site provides current savings and CD rates.
Institutions may pay different rates tied to different balance amounts.
Example: An institution pays a 5 percent interest rate on balances up to $5,000 and 5.5 % on balances above $5,000. If you deposit $8,000, the institution that pays interest on the entire balance pays you 5.5 % on the entire $8,000. Other institutions may pay you 5 % on the first $5,000 and 5.5 % only on the remaining $3,000.
Tip: To tell which method an institution uses, check the annual percentage yield (APY) disclosure. If it is a single figure for a balance level, you will be paid the stated interest rate for the entire balance. If the APY is stated as a range for each balance level, your earnings will depend on the balance you keep in each level. Of course, getting paid the stated interest rate on the entire balance is a better deal.
Determine the following about an account:
Tip: You can cut ATM fees by limiting yourself to only one withdrawal per week or by using only ATMs owned by your bank.
Tip: You can save up to 50% on the cost of checks by ordering your checks from your own supplier, instead of letting the bank order them.
Find out whether the following will apply to the account:
If you are looking into a CD, here are some questions to ask:
A recent survey showed that more than half of the surveyed individuals picked their checking account banks because of geographic location. Only 19% chose their banks because of cost-effectiveness (low fees). This shows that cost-effective accounts are out there, but it takes time to shop around for them.
An easy way for a bank to increase its cash flow is to add on fees here and there for services that used to be free of charge. Conversely, bank customers can increase their cash flow by getting a bank to drop a charge-or by changing banks.
Here are some tips for negotiating with your current bank to try to get a better deal on your checking account.
Tip: Many banks offer free checking to seniors, students, or the disabled, if the depositor asks for this service.
Tip: If you decide to take your business elsewhere, don’t overlook smaller banks, which may be more eager for your business.
Many people overlook a valuable service offered by banks: the overdraft protection line of credit. With this protection, if you write a check which would overdraw your account a loan is automatically made from a line of credit. With this protection you will not bounce any checks.
This type of service is most valuable to a self-employed individual whose business is seasonal. If there are times during the year when you have cash flow problems, the overdraft protection line of credit can save you headaches-and at a lower interest rate than other forms of borrowing.
Starting in 2010, automatic overdraft protection is no longer provided by banks and bank customers must opt-in for this protection. Don’t neglect to inquire about this service if it would suit your situation.
The Truth in Savings Act, a federal law, requires depository institutions to disclose to you the important terms of their consumer deposit accounts. Institutions must tell you:
To help you shop for the best accounts, an institution must give you information about any consumer deposit account the institution offers, if you ask for it. You will also get disclosures before you actually open an account.
In addition, the Truth in Savings Act generally requires that interest and fee information be provided on any periodic statements sent to you. And if you have a roll-over CD that is longer than one month, the law requires also that you get a renewal notice before the CD matures.
Only deposit accounts at federally insured depository institutions are protected by federal deposit insurance. Generally, the government protects the money you have on deposit to a limit of $100,000. If an account is in trust or co-owned, there may be an effect on the amount of insurance coverage you have.
Tip: Ask how the deposit insurance rules will apply to your deposit account. Federally insured depository institutions also offer products that are not protected by insurance. For example, you may purchase shares in a mutual fund or an annuity. These investments are not protected by the federal government.
More: For a documentation of the procedure you should follow-up after if believe there’s an error in your bank account, see Correcting Errors.
Tip: You can also check out the financial condition of your bank if you are concerned about protection for balances over $100,000.
Planning Aid: See Bank Financial Condition Ratings. This site provides ratings on the financial conditions of banks so that you can evaluate your institution.
You can also check out the financial condition of your bank if you are concerned about protection for balances over $100,000.
The Electronic Fund Transfer (EFT) system is a national payment mechanism that moves money between accounts. Here are some of the ways EFT is in use:
Automated Teller Machines (ATMs). You can bank electronically and get cash, make deposits, pay bills, or transfer funds from one account to another. ATM machines are used with a debit or EFT card and a code, which is often called a personal identification number or “PIN.”
Point-of-Sale (POS) Transactions. Some EFT cards can be used when shopping to allow the transfer of funds from your account to the merchant’s. To pay for a purchase, you present an EFT card instead of a check or cash. Money is taken out of your account and put into the merchant’s account electronically.
Pre-Authorized Transfers. This is a method of automatically depositing to or withdrawing funds from an individual’s account, when the account holder authorizes the bank or a third party (such as an employer) to do so. For example, you can authorize direct electronic deposit of wages, Social Security, or dividend payments to their accounts. Or, you can authorize financial institutions to make regular, ongoing payments of insurance, mortgage, utility or other bills.
More: For a list of common questions about pre-authorized transfers, see Common Questions About Pre-Authorized Plans.
Telephone Transfers. You can transfer funds from one account to another-from savings to checking, for example-or order payment of specific bills by phone.
People who use EFT systems are often concerned about safeguards in the system. Since there is no check-no piece of paper with information that authorizes a bank to withdraw a certain amount of money from your account and pay that amount to another person-EFT users wonder about record keeping, errors, and theft:
The answers are found in a federal law-the Electronic Funds Transfer Act. We have summarized the EFT’s protections.
A canceled check is permanent proof that a payment has been made. Is proof of payment available with EFT services?
The answer is yes. If you use an ATM to withdraw money or make deposits, or a point-of-sale terminal to pay for a purchase, you can get a written receipt-much like the sales receipt you get with a cash purchase- showing the amount of the transfer, the date it was made, and other information. This receipt is your record of transfers initiated at an electronic terminal.
Your periodic bank statement must also show all electronic transfers to and from your account, including those made with debit cards, by a pre-authorized arrangement, or under a telephone transfer plan. It will also name the party to whom payment has been made and show any fees for EFT services (or the total amount charged for account maintenance) and your opening and closing balances.
Your monthly statement is proof of payment to another person, your record for tax or other purposes, and your way of checking and reconciling EFT transactions with your bank balance.
Note: The time periods are longer for point-of-service debit card transactions and for any EFT transaction initiated outside the United States. In the meantime, you will have full use of the funds in question.
It’s important to be aware of the potential risk in using an EFT card. Note that the risks differ from those involved with credit cards. On lost or stolen credit cards, your loss is limited to $50 per card. On an EFT card, your liability for an unauthorized withdrawal can vary:
If you do not report an unauthorized transfer that appears on your statement within 60 days after the statement is mailed to you, you risk unlimited loss on transfers made after the 60-day period. That means you could lose all the money in your account plus your maximum overdraft line of credit.
Example: On Monday, John’s debit card and secret code were stolen. On Tuesday, the thief withdrew $250, all the money John had in his checking account. Five days later, the thief withdrew another $500, triggering John’s overdraft line of credit. John did not realize his card was stolen until he received a statement from the bank, showing withdrawals of $750 he did not make. He called the bank right away. John’s liability is $50.
Now suppose that when John got his bank statement he didn’t look at it and didn’t call the bank. Seventy days after the statement was mailed to John, the thief withdrew another $1,000, reaching the limit on John’s line of credit. In this case, John would be liable for $1,050 ($50 for transfers before the end of the 60 days; $1,000 for transfers made more than 60 days after the statement was mailed).
A financial institution may send you an EFT card that is valid for use only if you ask for one, or to replace or renew an expiring card. The financial institution must also give you the following information about your rights and responsibilities:
Generally, you must also get advance notice of any change in the account that would increase your costs or liability, or limit transfers.
A financial institution may send you a card you did not request only if the card is not valid for use. An “unsolicited” card can be validated only at your request and only after the institution makes sure that you are the person whose name is on the card. It must also be sent with instructions on how to dispose of an unwanted card.
The EFT Act forbids a creditor from requiring you to repay a loan or other credit by EFT, except in the case of overdraft checking plans.
Although your employer or a government agency can require you to receive your salary or a government benefit by electronic transfer, you have the right to choose the financial institution that will receive your funds.
Here are some frequently asked questions about pre-authorized plans.
Q. How will I know a pre-authorized credit has been made?
A. There are various ways you may be notified. Notice may be given by your employer (or whoever is sending the funds) that the deposit has been sent to your financial institution. Otherwise, a financial institution may provide notice when it has received the credit or will send you a notice only when it has not received the funds. Financial institutions also have the option of giving you a telephone number you can call to check on a pre-authorized credit.
Q. How do I stop a pre-authorized payment?
A. You may stop any pre-authorized payment by calling or writing the financial institution, so that your order is received at least three business days before the payment date. Written confirmation of a telephone notice to stop payment may be required.
Q. If the payments I pre-authorize vary in amount from month to month, how will I know how much will be transferred out of my account?
A. You have the right to be notified of all varying payments at least 10 days in advance.
Or, you may choose to specify a range of amounts and to be told only when a transfer falls outside that range. You may also choose to be told only when a transfer differs by a certain amount from the previous payment to the same company.
Q. Do the EFT Act protections apply to all pre-authorized plans?
A. No. They do not apply to automatic transfers from your account to the institution that holds your account or vice versa. For example, they do not apply to automatic payments made on a mortgage held by the financial institution where you have your EFT account. The EFT Act also does not apply to automatic transfers among your accounts at one financial institution.
Note: The time periods are longer for point-of-service debit card transactions and for any EFT transaction initiated outside the United States. In the meantime, you will have full use of the funds in question.
The following federal agencies are responsible for making sure that depository institutions follow the federal Truth in Savings Act. Questions about an institution should be directed as follows:
Division of Consumer and Community Affairs
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Tel. (202) 452-3000
Comptroller of the Currency
Customer Assistance Group
1301 McKinney Street
Houston, TX 77010
Tel. (800) 613-6743
National Credit Union Administration
1775 Duke Street # 4206
Alexandria, Virginia 22314-6115
Tel. (703) 519-4600