Smart Banking: ‘Free’ checking not always free

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You see plenty of advertising for “free checking” out there, but what does that term actually mean?

Free checking generally means a checking account with no monthly fee, usually called a “monthly maintenance fee,” or balance requirements. Those fees average around $5 per month, according to the most recent Bankrate data. So in theory, free checking saves you about $60 per year.

Watch for strings

For a checking account to be considered free, the lack of a monthly fee should be “no strings attached,” says Lauren Saunders, associate director of the National Consumer Law Center.

“It may be free only if your balance is above a certain level, and so you can get hooked in thinking it’s free and then find you’re getting monthly fees you didn’t anticipate,” Saunders says.

Each month, Bankrate’s “Smart Banking” feature will define a bank term and explain what it means for consumers. This month, it is “free checking,” a term that can mean something different from bank to bank.

Many banks will waive monthly fees for account holders who sign up for direct deposit, but those accounts aren’t really “free checking,” strictly speaking.

“A lot of times, it’s free if you have a direct deposit. The direct deposit has to be a certain amount of money,” says Susan Weinstock, director of consumer banking at the Pew Charitable Trusts. “If you stop meeting those parameters, then all of a sudden your free account is no longer necessarily free.”

Free checking: A dying breed

Truly free checking is harder to find than it used to be:

  • Only 38 percent of checking accounts at larger banks are now free, according to the most recent Bankrate Checking Survey. That’s down by half from 2009, when 76 percent of checking accounts were free.
  • To find a free checking account with the features you want, you may have to turn to a community bank or credit union, where free checking is still common. In a Bankrate survey last year, 72 percent of credit unions surveyed still offered free checking.

‘Free’ doesn’t mean ‘no fees’

Just because a checking account is “free” doesn’t mean you’ll never pay fees. In fact, the opposite is usually true, and a free checking account that’s a bad fit for your needs can end up being more costly.

For instance, if you’re the type of account holder who sometimes overdrafts his or her account, you should pay close attention to how a prospective bank handles overdraft charges. Overdraft fees average a hefty $32.74 apiece. Just a few overdrafts can quickly outweigh an entire year’s worth of monthly maintenance fees, the National Consumer Law Center’s Saunders says.

Also, Weinstock says, unlike monthly fees, overdraft fees are unpredictable and can hit with enough force to push account holders out of the banking system entirely.

Disclosures often clear as mud

It’s tough for consumers to get a complete picture of a checking account’s potential costs because of the convoluted ways in which banks have laid out those charges in the fine print.

The average checking account disclosure runs about 44 pages, Weinstock says.

Some financial institutions have made a commitment to presenting their fees in the clearer and more concise way recommended by Pew researchers. If you’re considering a new checking account, those banks may be worth a look.

Advice you can bank on

No matter what checking account you choose, make sure you’ve taken a thorough look at the fee schedule before you sign on the dotted line, Saunders says. And always be sure to opt out of so-called “courtesy overdraft” programs.

“For very small purchases that you could just skip or pay another way, you could be hit with $35 overdraft fees,” Saunders says.

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