Money Essentials

Pick the right type of bank account

Knowing your money habits will help you find the best and least costly bank account


Banks offer several different types of checking and savings accounts: Some pay interest, some don't. Some offer perks, some don't. Some are specifically for senior citizens or students, while others are geared to those with low incomes. They all share one thing in common, though. They each have restrictions, fees, and opportunities to waive fees if you meet certain requirements.

When shopping for a bank, consider:

How much money you plan to park at the bank

The higher your average balance, the more likely you are to get "free" checking with interest. Though minimum balance requirements vary widely from bank to bank, a fall 2009 survey from Bankrate.com found the average balance required for a no-fee, interest-bearing account was more than $3,372 if you want to avoid monthly fees. If you settle for a non-interest bearing checking account, however, the average minimum balance is just shy of $185.75 to avoid a monthly charge, according to the same study.

How many checks you write a month

Some no-fee accounts limit the number of checks you may write and charge high fees if you exceed that limit. On the other hand, the consumer advocacy organization U.S. Public Interest Research Group suggests if you only write a few checks a month and probably won't meet the minimum balance required to avoid fees, you might benefit from a no-frills, flat-fee checking account.

How many related banking services you'd like

If you use ATMs frequently, make sure the bank has plenty conveniently located near you. If you use another bank's ATM, you might pay $3.00 or more for the privilege, once you combine the surcharge imposed by the other bank and the fee your bank charges for going to a competitor's machine.

How many different types of accounts you want to set up at the bank

The more accounts you have with your bank, the greater your chances of getting price breaks and perks on its services and products. So if you have a checking and savings account and are taking out a mortgage or signing up for the bank's credit card, be sure to ask if you're entitled to any discounts.

Using the Internet is one of the easiest ways to compare fees, yields and minimum deposit requirements nationwide. Find out where to get the lowest credit-card rate or the highest interest for your savings.

Deciding to put your money in an interest-bearing account may seem like a no-brainer. But sometimes a no-interest checking account may be more cost-effective. Here's why:

Interest-bearing accounts don't bear much

Sometimes banks offer to waive fees if you maintain a higher balance in your account. As tempting as this may seem, make sure the expense of maintaining the account doesn't exceed the interest paid. There can be an opportunity cost to tying up all that cash in a low-yielding account.

Say you pay $4 a month (or $48 a year) in account and ATM fees. If you earn 2% interest, you need to keep at least $2,400 in your account just to break even. And you'll have a hard time earning any real return on your deposits, even if you don't pay fees. That's because the interest rates you earn on a checking or savings account often don't exceed the average annual inflation rate, which was just a hair over 3% from 1926 through 2009. In short, you end up losing purchasing power.

Consider CDs

There are, however, other ways to get better returns at a bank. Instead of parking the majority of your cash in a savings account, you could open a certificate of deposit (CD). If you've opened one at your bank, ask if your CD, checking and savings accounts can be "linked" -- that way, you'll have an easier time meeting minimum balance requirements in your checking account. When you open a CD, you agree not to withdraw your money for a period of time ranging from three months to five years or more. The shorter the term of the CD, the lower the rate you'll get.

If interest rates fall, you're in luck because the bank must give you the rate it quoted when you bought the CD. If rates climb, however, you're stuck with the rate you agreed to even though it's lower than one you could get if you bought a new CD.

You can get money out of a CD prematurely, but you'll pay a penalty -- typically three months' interest. If you have more than $100,000, you can put it into a so-called jumbo CD that pays even higher rates.

However, any amount over $250,000 isn't insured, so the excess is only as secure as the bank itself.

When opening a CD, be sure you understand whether the rate is fixed or variable, and how often the interest compounds. A CD interest rate can yield different sums of money depending on whether a rate is compounded daily, weekly, monthly, quarterly, or yearly.

Banks also offer money market deposit accounts (MMDAs), which invest your money in short-term loans to government agencies and corporations. Typically, they require you to keep around $2,500 on deposit. Because the minimum is high, a money market account is often free, and you're likely to get free checks to write against your account's balance. However, there may be a minimum check-writing amount, and you may be limited to the number of checks you can write a month.

When shopping for an interest-bearing account, keep the following in mind:

Banks frequently review yields

Yields are updated regularly, often on a weekly basis, and may lower or raise the rates quickly. That means the rate that's offered when you open your account may be dramatically different a year later, or even a month later.

Banks can quote rates that compound daily, weekly, monthly, quarterly, or yearly.

Over a period of 12 months, interest that compounds yearly could yield less money than a lower interest rate that compounds daily. To compare how much money you'll earn from various accounts in a year, ask for each account's "annual percentage yield" in addition to its interest rate. Banks typically quote both interest rates and APYs, but only APYs are calculated the same way everywhere.

To see how quickly your money will grow in an interest-bearing account, try our CNNMoney.com savings calculator.

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Updated 7/10/2012 with content changes - aross
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