Dumping your bank? How to choose a new one

November 11, 2011: 3:45 PM ET
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Thousands of Americans have been ditching large banks like Bank of America in favor of credit unions and other smaller institutions.

NEW YORK (CNNMoney) -- So you've had it with the hidden fees, the monthly minimums and the sky-high interest rates. Like thousands of other Americans in the past few weeks, you want to ditch your bank.

Now what?

The decision to drop a big commercial bank might be an easy one for many frustrated consumers, but the next step may not be so obvious.

For some people, the convenience of a big national institution like Chase (JPM, Fortune 500) or Bank of America (BAC, Fortune 500) may ultimately outweigh any ill will they've built up. For others, there are plenty of credit unions, online banks and smaller banks out there ready to embrace them with open arms.

Whether you decide to stick it out with a big national bank or switch to a smaller institution, there are a number of pros and cons to be weighed. Here are a few things to consider before you decide where to park your money:

Fees: "A credit union is going to smoke a commercial bank every day of the week and twice on Sundays in the fee column," said John Ulzheimer, president of consumer education at SmartCredit.com. That's because, in contrast to commercial banks, credit unions operate as non-profits.

"Earnings... that the credit union makes devolve to the members in the form of lower loan rates, higher deposit rates and lower fees," said Tony Cherin, a professor emeritus of finance at San Diego State University.

Smaller banks and online banks too, often offer free checking accounts and lower fees. As with many credit unions, they may also provide reimbursements for fees from ATMs outside their networks.

40,000 join credit unions in protest

Part of the reason the big banks ding customers with so many fees is that they need to appease shareholders and maintain a strong bottom line. And running those nationwide networks of branches and ATMs makes it more expensive to maintain customer checking accounts.

They're also already "swimming in deposits," and therefore don't need to be as aggressive in attracting new customers with lower (or no) fees, said Greg McBride, senior financial analyst at Bankrate.com.

That's not to say that some big banks aren't offering customer-friendly deals. Charles Schwab is advertising a free checking account with unlimited rebates on ATM fees worldwide and a minimum balance of just one cent for customers who also open a brokerage account with no minimum requirement.

Convenience: This is one area where the big banks have historically held the advantage, although smaller banks and credit unions are closing the gap.

With more branches and ATMs nationwide, leading banks like Citi (C, Fortune 500) and Chase have advantages based on scale that simply aren't available to smaller banks and credit unions, said Ulzheimer. They've also usually got customer service lines open 24/7, in contrast to the Monday through Friday, 9-to-5 schedule that is typical of most credit unions and community banks.

'I dumped my bank!'

As credit union membership has grown though, the industry has made strides on the accessibility front. The CO-OP Network, an alliance of credit unions across the country, offers surcharge-free ATM access at 28,000 ATMs in the U.S. That's only a shade behind the 29,000 ATMs nationwide offered by Citi.

Community banks and online banks also often belong to ATM networks. The Allpoint network, for example, includes both small banks and credit unions and offers access to 43,000 free ATMs nationwide. For people without an affiliated ATM nearby, there's also the option of getting cash back when you make debit card purchases, for example at the grocery store.

People who make frequent cash deposits -- like waitresses or bartenders -- or those who enjoy the face-to-face service that a teller provides should probably steer clear of online banks. But for people comfortable with a no-frills experience, online banks offer the ability to deposit checks by mail or to scan them at home via the Internet.

Rates on loans, credit cards and deposits: Because of their non-profit structure, credit unions usually offer more competitive rates than big banks on things like credit cards and CDs. For example, Citi's Platinum Select Mastercard has a variable APR of between 12% and 22% (after an introductory APR of 0% for the first 21 months) compared with the 10% purchase APR offered by the Pentagon Federal Credit Union, according to Bankrate.com.

For bigger loans, though, like mortgages or new business loans, the megabanks often have the advantage because they can better absorb the cost if the borrower defaults.

"Think about it this way -- is defaulting on a million-dollar loan going to hurt a smaller credit union more or a commercial bank?" Ulzheimer said.

For money market and savings accounts in particular, online banks offer some of the industry's best deals. Bank of Internet USA, for example, offers a savings account that pays 0.8% interest, compared with the 0.2% offered by USAA, according to Bankrate.com.

Will my money be safe? While smaller banks in particular have failed in larger numbers during the economic downturn, this shouldn't be a major concern. As long as your bank is backed by the Federal Deposit Insurance Corporation, your money is covered up to $250,000.

In the case that your bank fails, loan rates are locked in and checking services should be transferred seamlessly to a new institution, said Bankrate's McBride. The biggest threat when it comes to a bank failure is simply inconvenience.

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To make sure your bank is covered by the FDIC, and to see what kinds of accounts are protected, visit the FDIC website. If you want to check out the relative safety of an FDIC-insured bank, visit Bankrate.com, which provides safety ratings of up to five stars based on an institution's capitalization, asset quality, earnings and liquidity.

As for credit unions, most accounts are insured up to $250,000 by the National Credit Union Administration. Check to make sure your credit union is part of this group before opening an account.

There's a lot to keep in mind when switching banks, but experts say what's most important is to do your research and be open to new possibilities.

"Rather than focusing on just one type of institution, cast a wide net and make sure that you're finding the best deal for your financial needs," McBride said. To top of page

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