With interest rates so low, it becomes even more important to avoid bank fees. It can take just one fee to wipe out all interest that you earned for a month. If you see an account advertised as a free checking account, you shouldn't have to worry about a monthly service charge for a small balance or for missing a certain activity (like direct deposit). However, there are some free checking accounts that may not be as "free" as you might think.
If a bank calls an account a free checking account, it has to ensure it meets certain standards. Here's what the FDIC says about free checking:
Under Federal Reserve Board rules, an institution can't advertise a "free" checking account if you could be charged a maintenance fee or an activity fee - for example, a penalty for going below a required minimum balance. But your bank can offer a "free" account and still impose charges for certain services, such as check printing, ATM use or overdrafts.
So a bank can't have a free checking account with a monthly service charge for a low balance. However, there are other ways to force customers to maintain a minimum balance.
One example is Capital One Bank's High Yield Free Checking. There are no monthly service fees. However, there's a minimum combined balance of $5,000 unless the customer has a home loan. If this isn't maintained, the account is subject to conversion or closure.
Another example of a bank enforcing a minimum balance on a free checking account is at EverBank. Its Yield Pledge Checking Account isn't advertised as a free checking account, but it looks like a free checking account. There are no minimum balance requirements to avoid a monthly service charge. However, that's only when the customer doesn't sign up for online bill pay. If the customer signs up for the optional online bill pay, there's a $8.95 monthly fee unless a $5,000 minimum average daily balance is maintained.
Wells Fargo no longer offers a free checking account. Its Value Checking Account requires either a $1,500 minimum daily balance or a $500 direct deposit to avoid a monthly service fee. However, that's not good enough if you use its online bill pay. There's a $3 monthly fee for online bill pay usage unless your combined balance is at least $5,000.
Extra charges or requirements for online bill pay no longer makes sense in today's world. Most banks not only offer free online bill pay, but many encourage customers to use it instead of writing paper checks. However, as you can see, if you're going to sign up for online bill pay, don't assume it's free. In fact, some banks may charge you if you sign up for online bill pay and you become an inactive user. And it's not just banks. ABCO Federal Credit Union in New Jersey offers free online bill pay, but only if members who have enrolled are active users. There's a $4.95 fee if the enrolled member doesn't have at least one bill payment in a month.
A free checking account may not always be as free as you had expected. As I described above, online bill pay is one example of a service that's not always free. At some banks you may also see charges for services like ACH transfers. Last year I described 5 bank fees that often hit savers. In addition to online bill pay and ACH transfers, you have to watch out for inactivity fees and excessive number of withdrawals from savings or money market accounts.
If you don't want to worry about monthly service charges, there are several internet banks that offer free checking. Last week I reviewed the The Best Free Internet Checking Accounts, and last year I reviewed free checking accounts with non-interest perks. If you want a local free checking account, credit unions with free checking can be good choices.