Choosing a bank account, for the first time or when switching institutions, can be a big, life-impacting decision – especially if you’re using it for business interests or plan to get a large loan in the near future. Your needs determine the account you need, and your needs may be serviced by a wide array of products and offerings. As these will vary in availability and extent from bank to bank, it’s important to know what you’re looking for before you dive into a new account you may regret.
Which bank is right for you?
The first step in opening a bank account is knowing which type of bank you’d like to account with (yes, I am ashamed of my puns): a traditional brick-and-mortar bank, a credit union, or an online bank. It’s recommended to have a rough idea of what your financial needs are up front, as each type of bank offers a different variety of financial services.
Traditional Brick-and-Mortar Banks
Traditional banks are publicly owned, for-profit institutions. They can be national, regional, or state-based, but as a rule they’re larger than credit unions and can provide more products than online banks. However, due to maintaining larger physical locations and more onsite staff, as well as taking on higher-risk customers, they charger higher fees and lower interest rates than alternative options.
Brick and mortar banks have received mixed reviews in the press in recent years, especially as some of the largest had their shady business practices laid bare for the world to see (looking at you, Wells Fargo). However, most large banks are beneficial for the average person, especially for people who need all of their financial services to be in a single location. Bigger banks are more likely to have the most financial products on offer: credit and debit cards, personal and business loans, CDs, MMAs, and other investment and expenditure services. Bigger banks are also more likely to have top-of-the-line online tools, including incredibly user-friendly access to your funds. Most are also members of and insured by the FDIC, the Federal Deposit Insurance Corporation – each bank account member’s savings accounts are covered up to $250,000 in case the bank goes under.
Credit unions are nonprofit financial institutions owned by their members, and each credit union defines membership differently. Some require a small one-time or yearly membership fee; some only allow members of certain organizations, professions, or geographic locations to join. Personally, I bank with a credit union that only allows participants of the educational process – teachers, professors, and high school and college students – and their immediate family members to join.
Credit unions are usually smaller than traditional banks, but they offer better customer service as a rule, as well as higher interest rate earnings. Rather than being members of the FDIC, they are backed by the National Credit Union Association (NCUA) up to the same $250,000 standard.
Credit unions do have a few downsides, especially for members who want access to the widest variety of financial services. Many have less advanced online banking, as well as smaller (or no) networks of ATMs and smaller service networks.
With the advent of the Internet, we as a species have proven that any human interaction that can be uploaded, will be uploaded – and that includes banking.
Online-only banks are great for the technologically adept as well as for those who want the best interest rates on their loans and accounts. Due to having no brick-and-mortar locations, they have much lower overhead than either traditional banks or credit unions. This also means that all contact must be made by email or phone (again, any human interaction…).
The drawback with online banks is that processing your funds can be more difficult than other kinds of banks. They rarely have ATM networks, so free withdrawals can only be completed by transferring funds to a brick-and-mortar bank.
Choosing the right type of account
After you select your bank, it’s time to choose which type of bank account(s) is/are right for you. Each comes with its own benefits, drawbacks, and uses, so knowing what you want to do with your money going in – and what your limits are financially – is hugely beneficial in the account-picking process.
Checking accounts are good for everyday spending, paying bills, and turning your hard-earned cash into…well, cash. Some things to look at when considering a checking account include:
- Any required monthly fees
- Minimum balance requirements
- Any limits on daily transactions, including:
o Debit and checking transactions
o Cashback after purchases
o Online transactions
o Moving money between accounts
o ATM withdrawals
- ATM networks and access
- Online and/or mobile access
- Branch access
- Interest rates
Checking accounts, as with all types of accounts, come with their own limitations and drawbacks, potentially including lower APY (annual percentage yield – the interest earned on your money) than other accounts, monthly maintenance fees, ATM fees, and overdraft fees.
Overdraft fees on checking accounts are where banks are most likely to get you, as a singular charge can be upwards of $35, and if multiple transactions bounce in a day, each carries its own penalty charge. One thing to watch out for is your bank manipulating the order of your transactions. For example: you have $100 in your account, and you make three charges: $45 in the morning, $50 in the afternoon, and $80 in the evening, which would lead to you having a single overdraft fee. However, your bank could post them in the reverse order: $80, $50, $45 – which means you would be charged a second overdraft fee you shouldn’t. It’s always a good idea to check the reputability of banks under consideration to see if they have a habit of this or other unsavory financial practices.
Banks and credit unions bring in a lot of their money through your savings accounts: they take the funds from your savings and use them to finance the loans they make to other members. The interest made on your account comes from the bank sharing a small portion of their profits made on these loans with you (in other words, your account interest could be earned off your own mortgage). However, as APY yields on traditional savings accounts aren’t high, they’re not good for growing your wealth drastically – but they are good for those who don’t want to face the potential risks of large-scale investing.
Things to consider when opening a savings account include:
- Minimum account balance requirements
- Liquidity – access to your money and the ability to transfer your money as needed
- A decent interest rate; while interest rates can range from almost nil to 2%, a good interest rate is anything above .7-.9%, depending on location (which, admittedly, still feels like nil)
- Online and mobile access
- No excessive transaction or low balance fees
- Sub accounts to divide your funds into various goals, such as
o Emergency funds
o Car savings
o House/mortgage savings
o Vacation funds
The drawback with savings accounts is linked to Regulation D, a federal law that restricts savings account holders to six “convenient” withdrawals or transfers per month. Convenient withdrawals are defined as transfers made over the phone, online, through automatic bill payments, or between savings or checking accounts. While you can make more convenient transactions per month, each one after the sixth can carry an additional fee. You can get around this by making an “inconvenient” withdrawal – you can visit your bank and participate in the peopling process (shudders), or you can have a check mailed to your physical address.
Certificate of Deposit
A certificate of deposit, or CD (also called a share certificate at many credit unions), is a high interest savings account meant for those who want to grow their money – with a catch. When you put your money into a CD, you agree not to touch it for a predetermined length of time, which can range from months to years. The longer the term agreed to, the higher the rate is; the best CDs have a rate around 3%. While you can withdraw your money before the maturity date, penalties will be charged, with higher penalties applied the further from the maturity date you are. CDs with no fees to withdraw early usually have lower overall interest rates.
One method you can employ to take advantage of a high interest rate CD while still maintaining access to your funds is called CD laddering, in which you invest money in CDs with consecutive annual maturity dates. For example:
You invest in three CDs simultaneously, with one, two, and three-year maturity dates, respectively. When your year one matures, you either withdraw your money or roll your funds into a new three-year account. The next year, when your two-year matures, you can either withdraw your funds, or you can open a third three-year account. By your third year, you have three three-year CDs that mature one year apart, which means once a year you can withdraw your money – with interest! – or re-up with a new three-year account. The longer you can ladder your money, and the more accounts with longer time frames you ladder up to, the more money your investments will make overall.
Money markets are a way to take advantage of high interest rates without sacrificing access to your money, but they’re not good for small savings, as they have a minimum balance of up to $5000. Various money markets have features of all three accounts described above, so it’s important to look at what your bank offers before you decide. Many of them allow you to keep your money liquid, provide debit cards, and come with checks to allow you to spend your funds as needed.
Although the 2% or higher APY is very appealing, money markets are also subject to Regulation D restrictions, with one change: while checks and debit spending count toward your convenient withdrawals, an ATM withdrawal does not.
Now that the basics are out of the way…
Once you’ve chosen your bank and your preferred account type, it’s time to look at the specific details offered. Regardless of the account you choose, there are several important factors to be aware of, even if they don’t apply to you (yet):
- FDIC or NCUA insurance: while most banks are insured through one of these programs, it’s important to know if and which
- Funds access through methods such as:
o Branch locations
o Debit cards
o Online accounts
- Applicable interest rates, including tiered interest rates (where larger balances accrue more interest)
- Other products, such as:
o Business loans
o Personal loans
o Other types of accounts
- Applicable fees, such as:
o Monthly maintenance fees
o Minimum balance fees
o Overdraft frees and available overdraft protection
o Statement fees for paper statements
o Inactivity fees – while these are somewhat rare, that means they’re that much more likely to catch you by surprise
o Card replacement fees for stolen or lost cards
- Minimum balance requirements
- Sign-up bonuses – while you shouldn’t base your decision on bonuses alone, this can be a good way to break a tie between two otherwise-identical banking options
- Customer service: as a rule, credit unions have better counter service, while some national banks have 24/7 customer support
What you need to open a bank account
It’s time! Your new bank account is almost here! Here’s what you’ll need:
- A government ID, such as a driver’s license, passport, or nondriver’s ID
- Social security card/number or tax ID number
- Phone number
- For some banks, an initial deposit
- A co-owner, if you’re under 18
- Proof of geographic location or community membership for credit unions
All that’s left to do to activate your account is take your materials to a (gasp! people!) branch of your chosen bank and fill out the application. Some banks will allow you to apply online if you can provide the required resources.
What to expect when you open your new account
Applying for a new account doesn’t take too long, but there are a few things to do after opening a new account:
- Close out any old, unwanted accounts
- Provide your new account information to your employer for direct deposit
- Redirect automatic bill payments
- Download any mobile apps and accept email alerts
- Destroy any old cards or paper checks
- Move any items in your old bank’s safe deposit box to your new bank, if you choose a brick-and-mortar location
- Get a written statement from your old bank that your account has been closed and ask about re-opening policies, as some banks will reopen your old accounts to honor automatic payments, thus incurring sneaky fees