Today, banks offer different types of accounts that can meet your financial needs and help you handle your daily payments. Although it might seem straightforward to choose a bank account, you should consider a few factors to ensure that the account you choose is the best for you.
The following tips will help you decide between a checking account, a savings account, and a CD account.
Choosing a checking account
Checking accounts allow unlimited deposits and numerous withdrawals, unlike savings accounts, which limit both. Money is extremely liquid and can be used through checks, ATMs and electronic debits. However, in exchange for their high liquidity, checking accounts earn low-interest rates. The minimum deposit to open a checking account is $50 to $100 depending on the bank. Checking accounts are not insured by the Federal Deposit Insurance Corporation (FDIC).
Account fees you need to consider are:
- ATM Fees: Most banks charge fees for using an out-of-network ATM. Yet, you may be eligible for reimbursement for the fees charged by a visiting bank. Make sure to ask your bank about their reimbursement policy.
- Overdraft Fees: Financial institutions use overdraft fees as a strategy for making huge profits. Although they allow an overdraft, you may be charged up to $30 overdraft fees or high interest on the overdrawn amount or both. In addition, you automatically sign up for overdraft service when opening the account. Be careful when withdrawing money from your checking account or, even better, opt out of overdraft service when opening the account.
- Maintenance Fees: Most banks charge monthly maintenance fees, which may be waived if your account balance is high or if you hold a second account in the bank. Generally, maintenance fees are not applicable to checking accounts. On the other hand, there are minimum account fees if your account balance is below a certain amount.
In terms of transactions, avoid writing too many checks if your checking account does not offer unlimited service. If you set up online banking to save money, make sure to look for a checking account with unlimited online transfers and bill payments. Some banks offer checking accounts with no minimum balance requirement and waive the monthly fee if you agree to do all your transactions online or via the ATMs.
Choosing a savings account
Savings accounts earn a relatively high interest. Most people open savings accounts for a college education fund, an emergency fund or their first house savings. Although savings accounts are liquid, they generally do not allow using checks and electronic debits, unless you select a specific type or you are charged with extra fees. Moreover, they set a limit on deposits and withdrawals. Unlike checking accounts, savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC).
- Interest rates: Most banks pay an interest regardless of your account balance, while others require a balance of $1,000. Although the introductory rate may be high, after a certain period of time it may be dramatically reduced. Read the small print to ensure that your interest rate will remain competitive after the introductory period. The minimum requirement to open a savings account is $100.
- Money access: Make sure to have instant access to your money in case you need to make extra withdrawals. You may be charged a fee, but what is important is to be able to withdraw your money anytime you need from any branch. Alternatively, you may transfer funds to your checking account either through your bank or over the Internet.
- Fixed rate bonds: Some savings accounts use fixed-rate bonds, which offer a higher rate of interest for a fixed term, usually from six months to five years. However, you do not have access to your money during the term, so fixed rate bonds are preferred if you have a lump sum to invest. Be warned, you may not be allowed to make additional deposits once the account is opened.
- Service fees: Most banks do not charge maintenance fees for a savings account. Yet, you may be charged with fees for withdrawals over the limit or for transfers. Most banks may charge you a fee if your balance is below the minimum limit. Get a copy of your account agreement so that you are aware of the terms, conditions and fees involved.
Choosing a CDs
A certificate of deposit (CD) account is a savings certificate that entitles you to receive the fixed interest earned at maturity. The difference between a CD and a savings account is that CDs have a fixed term and a fixed interest rate and you need to wait until maturity to withdraw the funds together with the accrued interest. Generally, the term of a CD ranges from one month to five years. If you need to withdraw money during the term, there is a penalty charged. Like savings accounts, the Federal Deposit Insurance Corporation (FDIC) insures CDs.
- Interest rates: CDs pay a higher interest rate than a checking or a savings account, which allow withdrawals on demand. This is because the money is held on deposit for the agreed-on-term. The minimum deposit for most CDs is $1,000, but it can reach $100,000 (“Jumbo CDs”), which offers higher interest.
- Ladders: CDs allow you to use ladder strategies and distribute your deposits over a period of time so that you earn the highest rate at the longest term. Deposits mature annually, thus allowing you to re-invest or withdraw the funds in the short-term while realizing the earnings of long-term investment. You are also allowed to distribute your ladders across several banks to capitalize on better rates and longer terms.
- Closing a CD: You may close your CD after the CD has matured. However, if you withdraw your funds before maturity, you will pay a penalty. By and large, for a five-year CD, the penalty is equal to six months’ interest. When your CD approaches maturity, you may either roll it over to a new CD or cash it out.
No matter what type of account you have, banks charge hidden fees on unemployment checks. Major financial institutions charge fees on unemployment insurance and food stamps.
In short, a few years ago, people had a single bank account. Today, there are different types of accounts for different purposes. Choosing the right bank account requires collecting the right information about each type and deciding if a checking, a savings or a CD account meets your financial needs.