Editor's Note: The following is a guest post from Richard Barrington, a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
It was Mark Twain who once said that rumors of his demise had been greatly exaggerated. You could say the same about the articles floating around lately about the death of free checking accounts.
A new study of checking account fees by MoneyRates.com found that free checking accounts are still out there--you just need to know where to look. However, conditions in the banking industry are in a state of change and uncertainty due partially to the CARD Act, so over the next several months it will be important to keep a close eye on your bank statement--and on competing alternatives which might present a better offer.
Concern for the Health of Free Checking Accounts
If free checking is not dead, there has at least been cause to be concerned for its health. Once upon a time, banks were happy to use free checking accounts to attract customers, who could then be solicited for profitable lines of business such as lending. At the very least, customer deposits could be used as lending capital. In short, free checking was what marketers call a "loss leader": a money-losing product that helped attract and keep customers for money-making lines of business.
The collapse of the loan market, new government fees and taxes, and upcoming restrictions on overdraft charges all pose threats to this model of using free checking as a loss leader to help drum up profitable business. The theory goes that, with all this pressure on bank profits, many banks will decide they can no longer offer free checking accounts.
That may prove to be the case, but keep in mind that even the financial crisis has not suspended the rules of marketing. It's not like banks didn't care about maximizing profits previously, or were offering free checking as a public service. It was a calculated expense that was deemed worthwhile to attract business to the bank, and it may still be worthwhile, especially when the lending business rebounds.
In short, free checking may not really be an endangered species. At the very least, the latest figures show that it is not extinct yet.
What the Most Recent Checking Account Data Says
Those figures come from a MoneyRates.com survey of checking accounts in New York state. While conditions will vary from state to state, New York's wide array of banking products make it a good indicator of banking trends in general.
Perhaps surprisingly, the survey showed that in the latter half of 2009, average monthly maintenance fees and overdraft fees actually dropped slightly. The availability of checking accounts with no monthly maintenance fees actually increased in the sample. The catch was, however, that the average balance required to avoid fees went up.
Tips for Smart Shoppers
What all of this means is that free checking accounts are still out there, but you can't take them for granted. Here is some advice for getting the best deal out of a checking account:
- Over the next several months, keep a close eye on your checking account and any notices from your bank, to make sure you are aware of any new fee policies.
- Consider transferring some money from savings accounts or money market accounts into checking if this is necessary to meet the minimum balance to avoid fees. With bank rates on deposit accounts very low, what you save by avoiding monthly maintenance fees should exceed any interest you miss by keeping more money in checking.
- If your bank starts imposing a monthly fee, it's time to start shopping for a new bank, because for the time being, free checking accounts are still out there.
- Don't opt in to an "overdraft protection" program that includes an overdraft fee. It may seem like a convenience, but it should be one you rarely need. Effectively, incurring an overdraft fee is a very, very expensive way to borrow money.
Related article: Credit CARD Act Guide Part 3: Subprime-So Long Fee Harvester Cards!