Checking account fees: What are they and how to avoid them

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Checking account fees are what your bank charges you for making certain transactions or for not keeping a certain balance.

Overdraft fees, ATM fees and monthly service fees can add up. Even incurring just one of these fees is costly enough — for example, the average overdraft fee is $33.36, according to Bankrate’s 2019 checking account and ATM fee study, which surveyed 10 banks and thrifts in 25 large U.S. markets.

There’s good news if you’re looking for a free checking account: Bankrate’s study found that 42 percent of non-interest bearing checking accounts are free checking accounts — a 4 percent increase from the 2018 study.

The best free checking accounts don’t charge a maintenance fee and may even offer you a little bit of interest. They also give you an option to access some ATMs for free or reimburse some ATM fees. Here’s what you need to know about avoiding fees.

How to avoid ATM fees

There are a number of ways to avoid ATM fees. The three best online banks in Bankrate’s best banks of 2020 — Radius Bank, Bank5 Connect and Ally Bank — all had some sort of ATM surcharge reimbursement policy.

To avoid ATM fees, here are some steps you can take:

  • Before you use an out-of-network ATM, check your mobile banking app. Many apps have ATM locators that can help you find a nearby fee-free ATM.
  • Instead of going to an ATM, head to a drugstore, grocery store or other retailer that gives cash back for debit transactions and make a small purchase. 
  • Don’t opt in to debit card/ATM overdraft protection to help you have your card declined if you don’t have the balance to cover the transaction (rather than letting you take the money out in exchange for a fee). 

In 1998, the average ATM fee was $1.97, according to Bankrate data. That cost includes both a surcharge from the ATM’s owner and a fee from your financial institution. In Bankrate’s most recent study, the average total ATM fee is $4.72.

How to avoid overdraft fees

Overdraft fees, also known as nonsufficient funds (NSF) fees, hit bank customers slightly harder than they did a year ago.

A common overdraft fee is $35. But the average fee is $33.36, 13 cents higher than it was in 2018, according to Bankrate’s study.

Here are some ways to avoid overdraft fees:

  • Many banks allow account holders to set up text alerts to let them know when their balance falls below a certain amount. Getting a low-balance text may be enough to help you stop swiping your debit card in time to avoid overdrafting your account.
  • Check your app before you use your card. Seeing the balance may help you avoid overdrafting your account. However, be aware of transactions that aren’t yet pending, such as an upcoming subscription charge. Once they post, these transactions could cause an overdraft.
  • Get a checking account from a challenger bank that doesn’t charge you for overdrawing your account.
  • Try linking a line of credit or a savings account to your checking account to cover overdrafts. You still may pay a fee for the service, but it would be cheaper than paying an overdraft fee.

Federal regulations require banks to let customers opt out of overdraft on debit cards. For many people, having their debit card declined when they don’t have the money to cover a purchase is preferable to incurring a string of overdraft fees. Just make sure you have an emergency plan so that you’re not stranded.

Interest checking accounts are less competitive

Your average interest checking account used to be a decent deal: You’d keep a reasonable amount of money in your account, and your bank would pay you a reasonable amount of interest.

Today, things are different. To begin with, you’re probably going to have to meet a minimum balance requirement or pay a monthly fee, and that minimum balance is going to be high — an average of $7,123, according to Bankrate’s survey. Even worse, the average monthly fee you’ll pay if you fail to meet that threshold is $15.05.

With such steep requirements, you’d expect to earn a decent interest rate. In reality, you don’t. The average yield on interest checking is 0.05 percent annual percentage yield (APY), which means you would only receive $5 for every $10,000 you put in one of these accounts.

It is possible to find a high-yield checking account that’s earning about the same APY as a top-yielding savings account. But these accounts may have strict requirements to earn the top APY, such as making you do a certain number of transactions per month or setting up a direct deposit. The financial institution might cap this APY after a certain balance, too.

Why are checking account fees rising?

Fees tend to rise just like the prices of other items you buy on a daily basis. Like any business, a bank may try to generate revenue through fee increases — especially in the current rate environment.

“Lower interest rates squeeze bank margins and often lead to a greater reliance on fee income,” says Greg McBride, CFA, Bankrate chief financial analyst. “Consumers see this through higher account monthly service fees, overdraft fees and ATM fees.”

These rates also affect lending.

“As banks have seen low interest rates reduce the difference between what they earn on loans and pay on deposits, they’ve diversified the revenue stream into more fee-based activity,” McBride says. “Businesses like wealth management are one way, but account fees or other punitive fees are another.”

Luckily for you, there are other options and ways to avoid these fees. You can shop around and find a bank that doesn’t require you to keep a minimum balance. Some banks might offer options to help you avoid overdraft fees, too.

The best checking accounts don’t charge a maintenance fee and don’t require you to keep a minimum balance. Often, online banks are options to consider because they’re known for not having minimum balance requirements. For instance, nine of the top 10 best online banks in Bankrate’ best banks of 2020 didn’t charge a monthly service fee. The top three best online banks in Bankrate’s best banks list Radius Bank, Bank5 Connect and Ally Bank — don’t charge any maintenance fee.

Featured image by MoMo Productions of Getty Images.

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Written by
Matthew Goldberg
Consumer banking reporter
Matthew Goldberg is a consumer banking reporter at Bankrate. Matthew has been in financial services for more than a decade, in banking and insurance.