Where Interest Meets Account Fees And Features
Understanding how interest works on a savings account and comparing the APY offered at several banks are important steps in choosing where to open an account.
Weston says you can often get better returns from an online savings account because online banks dont have to pay for branches and can pass the savings on to consumers. Online banks therefore have advantages over traditional banks, she says, typically, no minimum account balance requirements or fees. For example, a Discover Online Savings Account, named NerdWallets 2020 Best Savings Account, comes with no account fees.1
Keep an eye out for fees, like those for overdrafts or ATMs, when youre comparing different savings account options. These could offset your interest earnings or even cost you more than you earn. Other potential expenses include fees for bank checks or outgoing wire transfers.
How Does Savings Account Interest Work
The interest rate determines how much money a bank pays you to keep your funds on deposit. However, Michael Griffin, a certified public accountant and finance professor, says you should use the annual percentage yield to compare savings accounts and other savings products.
The simple way to look at the APYits what you will get on your money, Griffin says. Meaning, you can use the APY to determine how much youll actually earn in interest each year because the APY relies on two inputs: the interest rate and how often the interest compounds. Both are important components of how interest works on a savings account because they impact how much money youll earn over time. Your savings account interest could compound daily, monthly, quarterly or annually.
Suppose you deposit $5,000 into a savings account, dont deposit or withdraw any more money and the interest rate doesnt change. If the account has a 1.00% interest rate and the interest compounds annuallythat is, the bank pays you interest on your balance once each yearyoull earn $50 after the first year. The APY will also be 1.00% in this example because your interest didnt compound multiple times during the year.
If a bank offers a 1.00% interest rate on a savings account, the rate of compounding could affect the APY and your earnings, although the differences may be minor.
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Tip #: Enroll In Direct Deposit
Direct deposit is another simple automated process that helps you avoid unnecessary fees or consequences. Some bank accounts have a minimum balance in order for them to stay open, and the bank may charge a fee if your account falls below this amount. Set up direct deposit to make sure that your hard earned money gets into your account and keeps it open with no fees.
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What Is A Certificate Of Deposit
Best for: Those who want to earn a high interest rate and don’t need to spend that money anytime soon.
Not for: Those who think they’ll need to withdraw their money before the CD’s maturity date
A certificate of deposit , also known as a share certificate if you’re using a credit union, is a special type of savings account that offers much higher interest rates — but there’s a catch. When you put the money into a CD, you’re agreeing that you won’t touch it for the length of the CD term. This can be anywhere from a few months to several years. Usually, the longer the loan term, the higher the interest rate. The best CDs can offer APYs of around 3%.
You can withdraw money from your account before it reaches its maturity date , but you’ll pay a high penalty. This is often a certain number of months’ worth of interest, and the farther away you are from your maturity date, the greater the penalty. A few CDs, known as no-penalty CDs, do not charge you if you withdraw your money early, but these usually have lower APYs than other types of CDs.
Looking for a CD? Check out our list of the best CDs available now.
How Do Checking Accounts Work
Theyre called checking accounts because, traditionally, they offer you the ability to write paper checks. A check is a financial instrument you can use to transfer money from your bank account to another person or another entity.
For example, if you borrow money from a friend, you could write out a check to them to pay them back. Or, if you need to pay your electric bill, you could write a check to the utility company for the amount you owe. The person or business you write a check to deposits it into their checking account. Their bank processes the check and the money is withdrawn from your account and credited to theirs.
Checks arent the only way you can spend money with a checking account, however. You also have these options for moving money in or out of a checking account:
- Debit cards. Debit cards bearing a Visa or Mastercard logo can be used to make purchases in stores or online and make deposits or withdrawals at ATMs.
- ATM cards. ATM cards can be used to make deposits or withdrawals at ATMs, but you cant use them for purchases.
- ACH transfers. ACH or electronic transfers allow you to schedule deposits or withdrawals, including bill payments, to and from your checking account that take place online.
- Wire transfers. Wire transfers can be used to deposit or withdraw large sums of money to other bank accounts in the U.S. and foreign countries.
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Checking Is Free But The Profits Are Hefty
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Banks are aggressively promoting free checking accounts. But some customers are discovering that free often comes at a price.
While customers no longer have to pay fees if their balances drop below a minimum, many who open these accounts often end up paying more in other charges, like those for bouncing checks or using automated teller machines. Without a minimum balance requirement, people may be careless about keeping enough in their accounts to avoid bouncing checks.
”The fact is, free checking accounts don’t turn out to be free for a lot of people,” said Gary D. Stein, a partner at the Capital Performance Group, a Washington consulting firm focused on banking. ”Banks make a lot of money off these accounts.”
Banks make money from free-checking customers in three ways. Because such accounts generally pay no interest, they provide a cheap source of money for the banks, which can then reinvest the money elsewhere, Mr. Stein said. The banks also use the accounts to attract new customers who will then buy their other products, like insurance or mortgages. Banks also charge many fees, particularly for covering bounced checks.
”You get into the theater for free, but we make money on the pop and the popcorn,” said William A. Cooper, chief executive of TCF Financial in Wayzata, Minn., which was one of the first banks to promote free checking aggressively.
What Is A Savings Account
Best for: Those who want a low-risk way to grow their money.
Not for: Those who plan to withdraw money frequently from their account.
A savings account is a low-risk account where you can earn interest on your money. Banks and credit unions take the money you place into your savings account and use it to finance loans for other customers. Then, they give you a portion of the interest they earn from the borrower. The average savings account APY is 0.09%, but some high-yield savings accounts offer APYs in excess of 2%. A higher APY will help your savings grow more quickly. While you can technically keep the money in your savings account indefinitely, savings accounts are best for money you plan to use in the next three to five years. Invest longer-term savings if you hope to beat inflation and actually increase your wealth over time.
Savings accounts don’t usually include checks or debit cards for accessing funds. You may need to transfer funds to a checking account before you can withdraw the money via check or debit card payment. You also need to be mindful of the account’s minimum balance requirement. If it has one and you let your balance fall below that level, you might incur additional fees.
If youre looking for a savings account, heres our list of the best savings accounts.
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Being Denied An Account
If you haven’t been a model account-holder, you can effectively be blacklisted from opening a checking account. Your best course of action is to avoid problems before they happen. Monitor your checking account and make sure you check the balance on a regular basis to avoid overdraft charges and fees. When they occur, make sure you have sufficient funds to pay them, the sooner the better.
If you are denied, ask the bank or credit union to reconsider. Sometimes the opportunity to speak with a bank officer is all it takes to get the institution to change its mind.
You can also try opening a savings account to build a relationship with the financial institution. Once you are able to get a checking account, it can be tied to this savings account to provide DIY overdraft protection.
Even if you have legitimate blots on your record, its important to know how your data is tracked and what you can do to fix a mistake or repair a bad history.
Finance : How Do Banks Make Money
Modified date: Oct. 19, 2020
Have you ever wondered why your checking account is free? Obviously, its not because your bank is feeling charitable. Big banks make big money. The kind of money that leads to the obscene Wall Street bonuses we so often hear about. But banks make money even when theyre not involved in Wall Streets multinational investment deals and billion-dollar hedge funds. Old fashioned retail banking is quite a business by itself.
Banks are never short of come-ons for winning new customers some banks offer new depositors free checks, cash bonuses or iPods .
Thats because banks cant make money until they have your money.
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They Slow Down Your Money Movement
In the early days of the U.S. banking system, it took days to move money around. Before ACH transfers, there was the Pony Express. Whenever you paid someone by check, it took days to clear because the check had to physically arrive at the bank where it could be accounted for. There was really no way around this, and it led to a phenomenon called float where slow money movement caused money to exist in two places at once.
Now theres no reason it should take multiple days for a check to clear but it still does. For the most part, its something bank customers have gotten used to and banks have quietly profited from. When you send a check electronically, your bank often deducts the money from your account the moment you hit submit even though they may not send the check for several more days. During that time, your bank has access to your money and can earn interest on it until the funds leave the bank, but you cannot.
Another example of this is how your bank generally receives your paycheck from your employer two days before they make it available to you. During that time, they earn interest loaning out your money while you cant access your pay. Over the course of a year, that means your bank is making 48 days worth of interest on your pay before you can even access it.
How Do Banks Benefit From Checking Accounts
Answer: Checking accounts provide bankswith a cheap source of funds that they then loan out at much higher interest rates. Banksmake money on the difference between long-term interest and short-term interest .
Simply so, what do banks do with checking accounts?
A checking account is a type of bankaccount that offers easy access to deposited funds. Unlikeother types of bank accounts includingsavings checking accounts typically allowunlimited withdrawals and deposits, making them a good choice tocover your everyday spending.
Subsequently, question is, how do banks make money on checking accounts? Banks typically make a profit based on thedifference, or spread, between what they pay in interest todepositors and the rate at which they can reinvest themoney. Since free checking accounts generally pay nointerest, banks can earn an even higher return byreinvesting the customers’ money elsewhere.
Likewise, people ask, what are 5 benefits of having a checking account?
Read on for the top five reasons that a checking accountcan benefit you.
- Safety and Protection. Even in a so-called safeplace, storing cash at home poses several risks, fromrobberies to fires to natural disasters.
- Convenient and Free Check Cashing.
- Convenient and Free Bill Pay.
- Debit Card Convenience.
How people get benefits from the bank?
Benefits of a Bank Account
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What To Look For In A Checking Account
The best checking accounts, whether they are online, high interest, or traditional brick & mortar accounts, typically have:
- High APY: Many checking accounts, especially those offered by online-based financial institutions, pay interest. To compare, look at the account’s annual percentage yield, or APY.
- Low fees: Given all of the great checking account options, there’s no reason that anyone should have to pay an account maintenance fee. Some online banks also don’t charge any fees for insufficient funds or overdrafts.
- ATM reimbursement: Some of the best online checking accounts reimburse ATM fees charged by other banks.
- Convenience: Banks that have large branch networks can often edge out their online counterparts when it comes to convenience — especially if you want to do your banking in person. That said, some online banks have massive ATM networks and easy methods to make deposits, even with cash.
How Do Banks Make Money By Giving Out High Interest Rates
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Have you ever wondered how banks can offer higher than average interest rates on savings or checking accounts? Banks are in the business of making money, even if that means taking a loss sometimes.
While that might sound counter-intuitive, it often works out well in the long run.
How do they do it?
To answer that we first have to look at how banks make money.
Once you understand how banks make money, then we can delve a little deeper and look at how marketing and other factors play a role in their product offerings.
Take a look SmartyPig and PerkStreet Financial, two relatively new financial institutions bringing in droves of customers, and for good reason SmartyPig offers higher interest rates than virtually any other bank, and PerkStreet offers best in class debit card rewards, starting at 2% cash back.
Then we can see how some of these banks are able to offer interest rates and rewards that far outpace their competition.
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Getting The Most From Your Deposits
When you make a deposit, your bank is making money from your money and paying a portion of it to you. Money goes in, interest eventually comes out. With that, you should do your best to earn the best interest rate possible if your bank is making money off of you, you should try to make as much money as you can off of them!
What To Look For In A Bank Account Or Credit Union
Once you’ve identified the type of financial institution and the type of account you’re interested in, it’s time to dig into the details. Here are a few things you should look into, regardless of your account type:
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What Is A Credit Union
Best for: Those who want good customer service and more favorable interest rates than brick-and-mortar banks.
Not for: Those interested in rarer product offerings, like business bank accounts or money market accounts .
Most credit unions are small local or regional institutions. They usually don’t have the advanced online banking tools or the large network of branches or surcharge-free ATMs that can be useful to those who travel often. They also tend to have fewer product offerings than larger banks. But they still draw many customers because their customer service is often better than some large national banks’ and they often have lower interest rates on loans and higher interest rates on checking and savings accounts.