You have to make a lot of financial decisions in your life. How much money should you deposit in your 401(k) plan every two weeks? Should you apply for a rewards credit card or a traditional one? Should you sink your dollars into a traditional IRA or a Roth IRA?
With so many big decisions to make, you might give little thought to your checking account. That, though, can be a mistake. Checking accounts are rarely alike, and credit union accounts usually come with fewer fees. Make the wrong decision, and choose a checking account that doesn't mesh with your spending habits, and you could end up paying big fees each month.
So that is far from a financially sound move.
Here's what you should look at before opening a checking account.
Your Spending Habits
Do you want dozens of checks each month? Do you have the bad habit of bouncing checks on a fairly regular basis? Do you frequently find yourself withdrawing money from ATMs that aren't connected to your financial institution?
These can all factor into which checking account makes the most financial sense for you.
For instance, if you write many checks, you'll want to apply for a checking account that allows you to write an unlimited number of them each month. Some checking accounts allow you to write a limited number of checks per month. You'll then pay a fee for every check you write over that limit. If you use checks to buy your groceries, pay your bills and fill up your gas tank, you could end up paying big each month if you do not take out an unlimited checking account.
What about bouncing checks? You'll pay a big fee from your financial institution every time you bounce a check. If you are habitual bouncer, you might consider taking out a checking account with overdraft protection. If you write a check at your local department store for $200, but only have $150 in your account, your financial institution will cover the difference, allowing you to complete your purchase.
Credit unions often provide free overdraft protection to members who qualify. Banks usually charge for this service. It pays to ask about the coverage available when you are shopping for your account.
You can also lose a lot of money each month if you are frequently withdrawing money from out-of-network ATMs. You can solve this problem by taking out a checking account with a financial institution that boasts a large network of ATMs. Next time you visit an ATM, look for network logos like CIRRUS, CO-OP, STAR and PLUS. These networks provide tens of thousands of ATM locations nationwide.
Finally, some checking accounts charge a monthly maintenance fee. Avoid these. There are plenty of free checking account options out there. There's no reason to pay for one.
One of the factors that should have little impact on your decision, though, is earning interest. Yes, it is nice to earn interest on the money in your checking account. However, if you use your checking account to pay your bills, the odds are that you will not have all that much money sitting in it at any one time. If that is the case, you will not earn much interest on a relatively low balance. Generally speaking, checking accounts do not perform well as savings vehicles. You would be better off opening a savings account and keeping funds that are in excess of your transaction needs in that account.
When you are deciding on a checking account, then, take a far closer look at the fees you might have to pay. Those are far more important than earning interest.