The Myth of Free Checking

So-called "free" checking accounts may still cost a small fortune.

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In the shadow of the Occupy Wall Street and Bank Transfer Day movements lurks a poorly kept secret. While many banks and credit unions market their checking accounts as free, consumers are paying more fees than ever. What, in theory, could be free, is actually costing us a princely sum.

And the numbers are big. According to research firm Moebs Services, consumers paid $31.6 billion in 2011 in overdraft fees. And according to a survey by Ally Bank, consumers were hit with $7.1 billion in ATM fees in 2010. Add to that the cost of checks, maintenance fees, and debit card fees, and the last thing that comes to mind is “free.”

Credit unions don’t fair much better, not withstanding their reputation as kinder, gentler financial institutions. While banks on average charge $30 for an overdraft, according to Moebs Services, credit unions charge $25 on average. And not all credit unions offer free checking. Still, according to a recent Bankrate survey, about 75 percent of credit unions offer no fee checking accounts compared to about 45 percent of banks.

But even “free” checking accounts charge overdraft, ATM, and other fees. So regardless of whether you choose a bank or credit union, free checking accounts may cost a small fortune. With that in mind, here are some tips to help you avoid fees wherever you bank:

Say No to Monthly Fees. A free checking account typically means that there is no cost to open an account and no monthly maintenance fees. In some cases, the monthly fee is waived only if you maintain a minimum balance. There are plenty of checking accounts that have no monthly fee regardless of the balance in the account. If you are considering a bank that requires a minimum balance, give careful thought as to whether you’ll in fact meet this requirement each month.

Monitor Your Account to Avoid Overdrafts. As noted above, overdraft fees cost consumers more than $30 billion a year. While overdrafts occur for many reasons, often it’s simply a matter of better managing the balance in a checking account. I’ve often been hit with overdraft fees because I simply wasn’t paying enough attention to my account. While the fee is better than bouncing a check, they can be avoided. With many banks, you can be alerted via email or text message when your account balance gets below a certain amount.

Avoid ATM Fees. Even with free checking you can spend a small fortune on ATM fees. The key to avoiding the fee is preparation. Know where your bank’s ATM locations are near your home and work. Recognize that you can get cash back on many retailers without paying a fee. If you are short of cash and not near your bank’s ATM, consider using your debit card if possible. And finally, when choosing a bank, give some consideration of its ATM locations. While credit unions can have lower fees than many banks, they often have limited locations and few ATM options.

Don’t Neglect Interest. As important as low fees are, don’t neglect the benefits that rewards checking accounts provide. Some accounts pay interest on checking accounts, like the ING Orange checking account. And a few checking accounts even offer cash back rewards.

Be Careful with Prepaid Cards. As bank fees have come under scrutiny, many have turned to prepaid cards. While these cards don’t charge certain fees, such as overdraft charges, most charge monthly maintenance fees, ATM fees, and even a fee each time you call customer service. There are, however, prepaid cards that do compare favorably to the cost of checking accounts, such as the Mango MasterCard.

DR is the founder of the popular personal finance blog The Dough Roller, and the credit card review site Credit Card Offers IQ.