Banks Move to Eliminate Free Checking

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Yahoo Finance posted an article over the weekend pointing to an end of the free checking accounts that we have all come to know and love.

In response to the Credit CARD Act of 2009 that will went into effect in February of this year, along with the new limits on credit card fees, banks have been scrambling to make up for the lost revenue.

The new regulations on interest rate increases, late payment fees, multiple fees on a single item, and the fact that bank account holders will have to “opt-in” to overdraft charges, will mean a significant loss of revenue for most banks.

The specific case of Bank of America was taken into consideration:

But Bank of America has decided to drop most of its [overdraft] program altogether. The nation’s largest bank, as measured by assets, said largely because of recent changes to its overdraft policy, it will forgo $600 million in revenue this year.

Bank of America makes 12% of it’s core revenue from service charges (according to Sandler Oneill + Partners), which means that these new regulations will have a large effect on their profits. They are not the biggest losers here, City Holding Co actually makes 28% of it’s core revenue from service charges – we can only imagine the changes coming to it’s customers!

According to the article, free checking accounts are not free to the banks:

More than half of all checking accounts are currently unprofitable, according to a report issued last month by Celent, a unit of Marsh & McLennan Cos. It costs most banks between $250 and $300 a year to maintain one of the roughly 200 million checking accounts, according to industry estimates.

They were able to offset these costs by charging various fees and service charges. Now with much of that eliminated or severely limited, banks are now looking for new ways to make a profit:

Customers will likely be required to pay new monthly maintenance fees on the most basic accounts that don’t generate a lot of activity. To avoid a fee, customers will have to maintain certain account balances or frequently use other banking services, such as credit and debit cards, automated teller machines and online accounts.

Many customers who now enjoy free checking will now be forced to pay a monthly fee in order to keep their accounts. One way to avoid these fees will be to utilize other services from the bank.

Since free checking is a large reason why many low income households have moved from using check cashing establishments to having bank accounts, this may have terrible consequences for many – especially those who do not make banking safely a priority! This may work to make the income disparity in this country grow at an even faster rate.

Paying $10 – $20 per month will seem pointless for many who simply deposit their paychecks and pay only a few bills from their account. They will probably move back to using check cashing stores and paying bills with money orders. This has the potential to make budgeting a nightmare (without an electronic trail of income and expenses), and can be detrimental to the finances of many households!

However, since these low-income households are not profitable to the banks, they are not motivated to keep them as customers and find other ways to replace lost revenue. To those customers I would say, if you are eligible (and most people are) for a credit union, it may be time to ditch your bank for one! Also, I would recommend that you take a look at some of the best cash investment options around.

So, what do you think about banks charging for even basic checking accounts? Some say that since banks are paying such low interest on savings accounts, they don’t need the additional fees from checking accounts – do you agree?

Do you currently enjoy free checking? Will you leave your bank if they levy a fee on your account?

photo credit: Hello Turkey Toe

Why You Must Keep at Least $500 in Your Checking Account

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Let me first say that I believe that every healthy financial household will include an emergency savings account with at least 9 to 12 months of living expenses. If one is still in debt, I usually recommend having about $2,500 in emergency savings until the debt is paid off (then boost that up to 9 months).

However, many people are not in a situation to make that a reality. So, this should be the first step toward financial freedom.

It is very common for people to not keep much money in their checking account – writing checks the moment that their pay hits their account (or, if you are like me, you set up online payments to come out on the same day that your direct deposit hits the account). However, having little to no money in your checking account between paychecks can be very dangerous to your financial well-being.

This is because there are various “unexpected” transactions that can occur from time to time that may bring your account into a deficit. This is why you should have at least $500 in your checking account at all times. This money should remain unspent and only be used if one of these aforementioned transactions occur.

Why We Need a Financial Cushion:

The purpose of this money is to serve as a cushion for your day-to-day or monthly spending. This protects you against any charges that may come up for which you are unable (or simply forgot) to plan. This could include bank charges, automatic withdrawals (annual memberships or subscriptions for instance) or just plain forgetting to reconcile your checking account periodically.

It is very easy to forget about that Auto Club Membership that automatically renews every May 15, but trust me, the Auto Club will not forget. And so, while you were expecting to have $100 in your checking account until payday, Auto Club deducts $150 from your checking account and you are now faced with overdraft charges as well as a negative balance! The same can easily happen with semi-annual or quarterly insurance payments, or any other bill that isn’t due monthly.

Once the payment terms for these agreements are established, you need to set up reminders to avoid surprises – however, it is a good idea to prepare for something that may slip through the cracks.

Also, if an emergency arises and you need money immediately, having a predetermined amount in your checking or savings account set aside for emergencies would be essential. This would reduce the amount of times you have to turn to your credit card or payday loans to bail you out.

The list of charges that can catch you by surprise can range from a deductible on your medical/dental insurance, to sitting on your glasses and needing an immediate replacement. The list can be endless, but the point is for you to begin to take steps to protect yourself from financial setbacks.

Some of the consequences of having an empty checking account include:

  • Overdraft Charges – Also known as NSF (Nonsufficient funds) charges. These can go from $25 to $40! This charge will occur every time a transaction hits your account, and you do not have enough money to cover it.
  • Negative Balance Charge – Some banks will charge you for each day that your account balance is negative. This can be $5 or $10 per day!
  • Below Minimum Balance Charge – Many checking accounts are assessed fees once the balance drops below a predetermined amount – say $100. These charges can go from $10 to $25!
  • Overdraft Protection Charges – If you have a savings account or credit card with your bank, they will allow you to link your checking account with it. This way, if you ever have too few funds in your checking account to cover a transaction, they will draw money from your savings account or credit card to cover the charge. This way, you can escape paying those ridiculous NSF fees! However, this “privilege” will cost you an extra $5 to $10 every time you employ it!
  • Being Forced to Take Out Payday Loans – Typically, these are extremely short-term loans that you promise to pay back on your next pay day. These loans carry interest rates anywhere from 300% to 900%!!!
  • Using Credit Cards for Daily Expenses – This is one of the worst things you can do, especially if you are trying to get or stay out of debt.

Okay, so now that you are thoroughly convinced that you need to have at least $500 in your checking account at all times, how do you go about doing it?

Reduce Discretionary Spending:

Look at small areas where you can reduce spending. Even if this is a temporary cut, it can be enough to get you towards your $500 goal. This could mean taking your lunch (and morning coffee) to work a few days a week – do this 3 days/week and save $10/day and it’ll take you about 4 months to reach your goal!

Instead of dining out twice a week, you can reduce it to one (could potentially save between $30 and $50 per week). Cut back or quit some costly habit (i.e. smoking, buying lottery tickets, etc). The point is to look at every area of your spending and identify where you can cut back.

Scale Back Services:

Similar to the first point, except now you should look at the various services that you subscribe to and make adjustments. Look at your cable bill and eliminate the channels that you don’t need. Or GET RID OF THAT GARBAGE ALTOGETHER!!! cancel the service entirely – it’s not as hard as you may think (read about Paul’s experience with eliminating TV service at ProvidentPlan.com).

Another easy way to find extra cash is to check your Wireless phone bill and reduce your plan to one that fits your needs. For instance, an Individual Plan with 900 minutes costs $60 with AT&T; if you only use 400/month, why not drop down to the 450 minute plan for only $40, or better yet, get a prepaid phone.

You could also get together with a few people that you trust and establish a Family Plan and split the bill! If you are out of your contract, use a service like Billshrink to compare your options and get the best price. If you have a landline and a cell phone, cutting the landline may be the best way to go.

Of course there are a myriad of options when it comes to cutting expenses (which we will cover in depth in a future article), such as shopping around for insurance or cutting coupons, you just have to examine your situation to see what is best for you.

Give Your Income a Boost:

There are a number of (legal) things you can do to earn a few extra dollars. Remember your initial goal is to establish a $500 cushion in your Checking Account, so don’t get discouraged if you can’t free up or earn thousands of dollars at once!

You can try to get a few hours of overtime at work, or take on a second job temporarily. Consider cleaning out your closet/attic/garage and sell a few things (find out how to conduct a yard sale). You can even start making money using the internet!

By combining a few of these expense cutting and income generating tools, you can be at your goal in a month or two!

Of course, cutting expenses and increasing your income does not only apply when you need $500. This should be a way of life, no matter what financial level you are on; from building the cushion we talked about today, to paying off debt, saving for retirement or even if you are already retired!

Do you have any questions about banking fees? Have any great ideas on cutting expenses and saving money? Any advice on earning extra income? Please share your comments below!

photo credit: David Cesarino