Why checking account fees may matter more than interest rates
Like most products, bank accounts generally involve both costs and benefits. For example, bank account fees represent a cost, while interest earned can be a benefit. Personal checking accounts are the most common type of account for everyday banking needs. Unfortunately, with checking accounts, the costs are especially likely to exceed the benefits.
The good news is that you can turn the cost-benefit trade-off in your favor by choosing the right checking account. This involves not just shopping for the best deal, but also understanding how your use of the account will impact the price you pay. Financial institutions, including banks and credit unions, rely on fee income, and banks charge a variety of fees for account services such as maintenance, overdrafts, and ATM usage.
Understanding interest-earning accounts
When you deposit money at a bank, you are giving that bank capital that it can use for other operations. They can invest that money or lend it out in the form of car loans, mortgages, personal loans, etc.
Since having that money is valuable to the bank, they generally pay interest to attract deposits. Some accounts, including certain checking accounts, offer competitive interest rates as a feature, providing additional financial benefits to account holders.
Below are some examples of common types of interest-bearing bank accounts.
High-yield savings accounts
Savings accounts allow you to access your money at any time, but they are generally intended to be used for a limited number of monthly transactions. In return for their low activity levels, savings accounts generally charge low or even no regular fees.
While most savings accounts pay interest, high-yield savings accounts are those that pay an interest rate that is well above the national average. Even high-yield account rates are still fairly low, but at least you can earn a little something just for having your money in a bank.
Money market accounts
Money market accounts perform a function similar to savings accounts. Money is available on demand, but these accounts aren’t intended for frequent transactions.
Like savings accounts, money market accounts generally have little or no regular fees. They pay moderate interest rates, though some are significantly higher than others.
Certificates of deposit
A certificate of deposit is an account that requires you to commit your money to the bank for a specific amount of time. That time can range anywhere from one month to several years.
Because you’ve committed your money for a known period of time, the bank has more options for how it can use that money in the meantime. This allows them to pay higher rates on CDs than they typically pay on other accounts.
Generally speaking, the longer the CD term, the higher the interest rate you can earn, though this can vary with market conditions. In most cases, if you take your money out of the CD before the term is up, you’ll pay a penalty. Otherwise, though, CDs don’t usually have fees.
Interest-bearing checking accounts
Unlike savings accounts and CDs, checking accounts are designed for frequent transactions. Money can move into and out of these accounts quickly, through a combination of direct deposits, check writing, automated bill payments, debit card charges, and the like.
Because of this, checking accounts pay little or no interest. To offset the cost of processing frequent transactions, they generally charge a monthly fee. Some interest-bearing checking accounts offer more benefits, such as fee waivers or rewards, if you meet certain criteria. They may also charge a variety of other fees that are based on how you use the account. Maintaining the minimum balance required during each statement cycle can help you avoid fees and access additional account features.
The full cost of checking account fees
Here are some common examples of checking account fees:
Monthly maintenance fees
These are charged once a month, regardless of how much or how little activity you have in the account. Monthly maintenance fees are typically a fixed dollar amount that doesn’t change whether you have a lot of money in the account or very little. However, many banks offer ways to waive the monthly or waive the monthly maintenance fee by meeting certain requirements, such as maintaining a certain balance or setting up a qualifying direct deposit.
MoneyRates calculated the average checking account fee from the five largest banks in the U.S. Together, these five banks have roughly a third of all deposits nationally. This analysis found that the average checking account monthly fee was $13.80. That would make the average cost of these accounts $165.60 per year. Eligible accounts may qualify for fee waivers if you maintain a certain balance or set up a qualifying direct deposit.
Ways to avoid monthly maintenance fees include:
- Maintaining a minimum daily balance in your account
- Setting up a qualifying direct deposit
- Being a member of certain rewards programs
- Choosing accounts with no monthly maintenance fees, regardless of balance or activity
Many banks provide multiple ways to avoid monthly maintenance fees, so it’s important to review your account’s requirements.
Overdraft and NSF fees
Overdraft fees are what a bank charges for temporarily covering the shortfall if you write a check or use a debit card when you don’t have enough money in the account. Overdraft fees are typically around $35 when a bank covers transactions that exceed the account balance.
A non-sufficient funds (NSF) fee is charged when the bank declines a payment because you don’t have enough money in your account. Banks may charge a returned check fee of about $35 when a transaction is declined due to insufficient funds.
A negative balance in your checking account can trigger these fees. Many banks offer overdraft protection services that link a savings account or line of credit to your checking account to cover overdrafts and help you avoid overdraft fees. Account holders can often avoid overdraft fees by enrolling in overdraft protection.
In either case, trying to spend more money than you have in your account can get expensive. A 2024 study by the Consumer Financial Protection Bureau found that 18 out of the 20 largest banks charged overdraft/NSF fees. Most of these fees were above $30 per occurrence. If more than one transaction takes place while your account lacks sufficient funds, you could be charged multiple fees.
ATM and transaction fees
Most banks let you use their ATMs for free. This extends both to machines at their branches and ATMs that are part of a network to which they belong.
The problem comes when you use an out-of-network ATM. This could cost you twice. Your bank may charge you a fee for the transaction, and the owner of the ATM might also charge you. ATM fees for out-of-network transactions average around $4.77.
These fees may seem fairly small – often from $1 to $4 per transaction. However, as a percentage of many ATM transactions, they can be considerable.
Paper statement and inactivity fees
With so much banking taking place online, many banks now charge a fee to receive paper statements. Banks may also charge fees for services such as paper checks, money orders, and wire transfers, which are often used for specific transactions or payments. You may also encounter a fee if you go a long time without having any activity in your account.
Interest vs. fees: What impacts your money more?
How do checking account fees affect the cost and benefits of the account?
The answer to that depends on how much money you keep in your account. Checking account fees are typically charged as a set dollar amount. That means they are the same for small accounts as for big accounts – and therefore represent a larger percentage of smaller accounts.
If you are an account owner who meets certain criteria, such as being under age 25 or participating in a Preferred Rewards program, you may qualify for fee waivers that reduce or eliminate these charges. Additionally, setting up account alerts and low balance alerts can help you proactively manage your account, stay informed about your balance, and avoid unnecessary fees.
Real-world example: $1,000 vs. $5,000 balance
Here’s an example. As noted earlier, the average maintenance fee on checking accounts at the five largest U.S. banks amounts to $165.60 per year.
If you have a $1,000 checking account, that represents over 16.56% of your account. In contrast, according to the FDIC, the average rate offered on interest checking accounts is 0.07%. Even if you find an account with an above-average interest rate, you’d almost certainly pay much more in fees than you’d earn in interest.
If you have a larger account with a $5,000 balance, the numbers are less stacked against you.
The average maintenance fee would cost you the equivalent of 3.31% per year. That’s still higher than the average interest rate of 0.07%. However, many checking accounts offer a maintenance fee waiver if you keep your balance above a certain amount. You can easily find a bank where a $5,000 balance would qualify you for a fee waiver.
When high interest is worth the trade-off
At today’s interest rates, you’re unlikely to find a checking account that pays enough interest to offset the typical maintenance fee. However, if you can qualify for a fee waiver, interest rates become more important when choosing a bank.
Fee waivers typically only apply to monthly maintenance fees. You should also take into account whether you’re likely to incur other fees, especially those for overdrafts.
For most people, the smart move is to look at fees first when choosing an account. If you can neutralize the fees by the way you use the account, then the interest rate becomes more important.
How to choose a checking account with no fees
If you want a checking account with no fees, it depends partly on the bank you choose and partly on how you use the account. Many banks now offer personal checking accounts with convenient mobile banking features, allowing you to manage your account, monitor transactions, and avoid fees using their mobile banking app or mobile app for secure, on-the-go access.
Some banks waive monthly service fees if you meet certain requirements, such as maintaining a minimum balance or making a certain number of transactions. You can often set up direct deposit to help avoid monthly fees and unlock additional account benefits.
Follow banking habits that won’t incur extra fees
You’re unlikely to find an account that has absolutely no fees. However, many fees can be avoided. You can do this by staying away from overdrafts, using out-of-network ATMs and continuing to use paper statements.
Compare checking account fees across banks
Shop for a bank that suits your needs. Compare fees before choosing a checking account. Monthly maintenance fees are the most important because you pay them no matter how you use the account. However, if your banking habits mean you’re likely to incur things like overdraft or ATM fees, you should compare those as well.
Look for a checking account with no monthly fees
There are checking accounts with no monthly fees. Finding one of those is especially important if you expect to maintain a small monthly balance.
Monthly fees can represent a huge percentage of smaller checking account balances. Even worse, they put you at greater risk of overdrafts by draining your account when you need the money.
Use direct deposit and balance minimums to waive fees
Another way to avoid checking account fees is to research how to qualify for fee waivers. For many accounts, one way to do this is to maintain a required minimum balance. Some banks will waive fees for checking accounts if you have your pay or benefits directly deposited into the account.
Consider online banks with no checking account fees
Online banks are an especially good place to look for a checking account with no monthly fees.
First of all, online banks have less overhead than those that have to maintain extensive branch systems. That can make them better able to offer checking accounts without monthly fees.
Also, online banking gives you a wider choice of options than limiting yourself to banks with branches in your area. That gives you a better chance to find a bank that will allow you to avoid checking account fees.
A little effort can save you a lot in bank account fees
If you’re paying a monthly maintenance fee on your checking account, chances are you could do better.
Shopping for an account without monthly maintenance fees, qualifying for a fee waiver, and adjusting your banking habits to avoid extra fees are all ways to avoid checking account fees. Eliminating that cost is well worth the effort.
