How to Choose a Bank or Financial Institution
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If there’s one relationship that is likely to last a while, it’s your relationship with your financial institution. Your financial institution holds one of your most precious assets — the money you earn. Whether you’re looking to open a new account or switch to something new, here is how to choose a bank.
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Choosing a bank requires some work
Choosing a bank is like choosing a relationship, so you don’t want to just jump in. You want to do your research and compare banks, review financial products, and assess the pros and cons. You can start here with the following steps.
Step 1: Assess your needs
When choosing a bank, the first thing you want to do is to assess your needs. Review your current financial picture and look ahead at your financial goals. What types of products and services will help you reach your goals? Do you want bill pay or direct deposit? Write down what types of accounts you’re looking for and any financing products you’re considering (such as a mortgage or credit card).
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Step 2: Review types of bank accounts
When choosing a bank, review the types of accounts the bank offers. Does the bank offer various types of checking and savings accounts? Is there the option to have money market accounts or certificates of deposit? Review the bank’s financial products and what they offer. Common types of accounts include:
Checking accounts
A checking account is your main financial account where you can deposit money. So when you deposit your check, it typically goes to your checking account. Checking accounts are tied to your debit card, used for day-to-day spending. When you use a debit card, money from your checking account covers the purchase.
So unlike a credit card that allows you to pay off the balance later, debit cards take from your checking account in real-time at the point of purchase. You could be hit with an overdraft fee if you don’t have enough funds in your checking account. Debit cards also do not affect your credit score or show up on your credit history. It is used more daily for expenses and can be a useful tool for budgeting, as you can easily track your spending. Plus, you’ll avoid debt by using the cash available rather than credit.
Savings accounts
Another financial product banks typically offer is a savings account. Savings accounts help you stash away cash for a rainy day or can be used to start your emergency fund. There are traditional savings accounts that earn little to no interest and high-yield savings accounts, which can earn you more interest with a higher annual percentage yield (APY).
Having your emergency fund in a high-yield savings account is a good idea. It’s not accessible through your debit card, making it a bit harder to touch, and you could earn more interest too.
Step 3: Look at interest rates, aka APY
When you decide to house your money at a specific bank, you want them to take care of it. You want to protect your money and also help it grow. That’s why you want to look at the interest rates the bank offers.
Typically, interest is referred to as the annual percentage yield (APY). Some banks may offer high-yield savings accounts to help you earn interest on your deposits.
High-yield savings accounts have a higher APY than traditional savings accounts. Reviewing APY is important when choosing a bank, so compare the numbers to earn interest while you sleep. Typically, online banks and credit unions provide better rates.
Step 4: Review protections and convenience
Another thing to look for is FDIC protection. FDIC stands for Federal Deposit Insurance Corporation and insures your deposits, typically up to $250,000. The federal agency has been around since 1933 and protects consumers in the case of a bank failure.
So if a bank goes under, your money isn’t just wiped out; you’re protected. Since the inception of the FDIC, nobody has lost any money due to bank failure.
Credit unions are protected by a different entity, the National Credit Union Administration (NCUA). The NCUA manages the National Credit Union Share Insurance Fund (NCUSIF), which acts similarly to the FDIC and covers deposits up to $250,000 as well.
On top of reviewing the protections in place, you also want to look at convenience. Consider the following questions:
- Network ATMs – are there any nearby?
- Is there a mobile banking app?
- Can I deposit a check online?
- Are there branches nearby?
- Can I talk to a human if I need help?
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Step 5: Choose a bank
Once you’ve figured out what you need and compared accounts, interest rates, and protections you can choose a bank to work with. There are many different financial institutions to choose from and three different types of banks that you can consider.
Bank options
- Traditional bank. These are typically national banks with many branches. These brick-and-mortar banks offer many financial products (such as credit cards and loans) but may charge some account fees.
- Online banking. Unlike traditional banks, online banks work only ... well, online. Because they’re saving on having brick-and-mortar banks, they can typically offer a higher APY on savings accounts and may have a better digital banking experience.
- Credit unions. A credit union is similar to a bank but is actually a financial cooperative. Credit unions are not-for-profit organizations serving their members as community banks. Many credit unions have a membership based on shared professions (such as teachers), location, or employer. Credit unions typically invest profits back into membership by offering higher savings interest rates as well as lower fees.
Here is an overview of the major players among these three banking options.
Traditional banks
When it comes to traditional banks, there are several “big banks” to choose from. Here are some of the best banks.
Citibank
If longevity and experience are important to you, consider Citibank, which has been around since 1811. Its history is also interesting.
Britannica says, “In 1811, the U.S. Congress refused to renew the charter of the First Bank of the United States — the country’s central bank, which had branches in cities such as New York. Thus, on June 16, 1812, some of the First Bank’s New York shareholders and other investors secured state incorporation of the City Bank of New York, which was later established in the branch banking rooms of the old First Bank.”
The bank offers checking accounts, savings accounts, and other financial products.
Wells Fargo
Wells Fargo bank is often associated with its signature stagecoach. It was founded in 1852 and was well-known as an express company and bank. The bank offers checking accounts, savings accounts, and other financial products for personal, small business, and commercial use. Though the bank has a long history, it’s also been in some hot water due to fraud and mismanagement.
Bank of America
Bank of America is a big bank that serves a variety of sectors, including retail, small business, global commercial banking, and more. The bank offers checking accounts, savings accounts, and other financial products. It’s important to note that Bank of America does have bank fees, such as a monthly maintenance fee. If you have less than $1,500 in your account, you could be charged $12 per statement cycle.
Online banks
Numerous online banks don’t have physical branches but may offer more competitive interest rates.
Capital One
Capital One is a major player in the online bank scene. Though the bank has some cafes and branches, it’s mainly online. The bank offers a top-rated mobile app as well as mobile deposits. You can also set up savings goals within your account.
Ally
Ally was voted the best online bank for 2019-2020 by Money magazine. The company offers a premium mobile experience as well as “buckets” to save for different things, such as your emergency fund, vacation, or vet bills.
Marcus
Marcus by Goldman Sachs is an online bank that helps you manage your money easily through its mobile app. According to their site, their high-yield savings accounts have a rate that is 4x the national average.
Credit unions
When choosing a bank, you can also consider credit unions. Credit unions will have different membership requirements and may be limited by location or profession. You can find a credit union near you and compare the options available.
Cost and fees
When you’re looking to entrust a place with your hard-earned dough, you want to make sure the bank has your back and can support your financial goals. That’s why it’s important to review the costs/fees on accounts at each bank.
For example, some banks, such as Bank of America, have monthly maintenance fees. A monthly maintenance fee is typically something you pay if your account has gone below a certain amount. For Bank of America, the minimum balance requirement is $1,500 for Advantage Plus Banking.
You also want to look for the following fees:
- Overdraft fees. An overdraft fee is a charge that is triggered by the bank if you spend more than what is in your account at the time of purchase. You overdraw your account and incur an overdraft fee when you do that.
- ATM fees. Some banks may have ATM fees that you should look out for. Verify the cost and compare it among the different accounts. On the other hand, some banks or credit unions may reimburse you for ATM fees, so if you get cash at a different bank’s ATM, you won’t be responsible for the charge, making them fee-free ATMs.
- Foreign transaction fee. You could incur a foreign transaction fee if you use your debit or credit card abroad. A foreign transaction fee is basically the cost of running your card in a different country. Some banks offer cards with no foreign transaction fees.
- Lost card fee. Things happen, and your card could end up lost. Check to see if the bank charges a lost card fee.
- Replace checks cost. Even though checks are becoming extinct, you may still have to use checks for rent or paying contractors. How much does it cost to order new checks if you run out of checks?
These fees can add up, so you want to know what you could be charged before committing to a bank.
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Low fixed rates from 6.99%—25.49%
Pros and cons
Before choosing a bank, look closely at the pros and cons. That can help guide your decision so you can be informed and prepared. Let’s take a look.
Traditional banks
Pros
- Access to more branches
- More financial products available
- Comprehensive ATM network
Cons
- May have monthly maintenance fees
- Interest rates aren’t as competitive
- May have minimum account balance requirements
Online banks
Pros
- Typically offers higher interest rates
- Little to no service fees
- Convenient mobile app
Cons
- May have a smaller ATM network
- No human support in most cases
- Difficult to deposit cash
Credit unions
Pros
- Offers high interest rates on savings
- More affordable rates on loans
- Lower fees
Cons
- Fewer financial products available
- Limited branches
- Potential for a poor online/mobile experience
Regardless of what type of bank you choose, there will always be good with bad. But you want to make sure you find something that can help you with your financial goals and is convenient and easy to use.
The bottom line
Choosing a bank can be a big task, so you want to do it carefully. Remember, you’ll have a close and long relationship with the bank, so you want to find something that fits your financial needs. Taking the above steps and reviewing costs, pros, and cons can help you make an informed decision.
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Writer
Melanie Lockert is the founder of the blog and author of the book, Dear Debt. Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Business Insider, VICE, Allure and more. Melanie writes about student loans, credit, and mental health and also is the host of The Mental Health and Wealth Show podcast.
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