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Avoiding Fees

In this topic, we cover:

  • Ways to minimize banking and credit card fees.
  • Ways that savings accounts can minimize or avoid banking fees.
  • How fees for some financial services can hide extreme interest rates.

Money Shredder

You'd never toss $35 down on the street and walk away, but every time you make a late credit card payment or overdraw your bank account, you could be charged that much or even more. 

To keep your charges as low as possible, make sure you understand the circumstances in which fees would be charged. For example, are you limited to a certain number of debit or ATM transactions per month? What’s the charge for using another bank's ATM machine? Are you automatically enrolled in high fee services like courtesy overdraft services? Avoidable service charges could cost hundreds of dollars per year if you're not careful.

Here are some tips to avoid banking fees: 

  • If moving to a new town and changing banks, make sure your new bank has ATMs conveniently located near your work or school. Otherwise, you could be charged a fee for simply withdrawing cash. 
  • If setting up a new account, estimate how often you'll write checks and how often you'll use your debit card. Choose an account that meets your needs to avoid transaction fees. 
  • Some banks or credit unions offer free or low-fee basic checking accounts while others offer to waive the monthly fee if you maintain a minimum balance or meet certain transaction requirements. If you can avoid a monthly account fee, you could save an average of over $100 per year.
  • Avoid bouncing checks or exceeding your account balance when using a debit card. Bank fees could be between $30 and $40 per transaction and some merchants and landlords may impose additional fees. 
  • Explore whether your bank reduces monthly fees with direct deposit or automatic transfers to your savings account. 
  • If you will frequently be near a zero checking account balance, explore options to help you avoid overdraft fees including automatically transferring money from a savings account. 
  • Save money when reordering checks. When reordering checks, you can buy checks anywhere - not just from your bank or credit union. You may be able to save 50% or more ordering checks from a discount vendor online, but make sure to use only reputable vendors.
  • Be mindful of interest-bearing accounts if you cannot otherwise meet the conditions to avoid the monthly fee. The amount of money you would earn at today’s low interest rates is negligible. Most importantly, many interest bearing accounts have minimum balance requirements. If you dip below your required minimum just once, you could be charged more fees than you would earn in interest for a year or more.
  • Consider Direct Deposit or Automatic Transfer. If you have a job, setting up a direct paycheck deposit will reduce some fees at certain banks. Setting up automatic checking to savings deposits may also reduce fees. 

Financial institutions typically offer several checking account plans with different interest rates, fees and minimum balance requirements. When making account choices, be sure to read the fine print about transaction limits and add-on fees in light of how you'll actually be using the account. If the account doesn't match your needs, even a "free" account could be expensive after unexpected fees are added.

Fee-Based Financial Services

You’ve probably seen storefront businesses offering check cashing and quick loans.  

These so-called “alternative” financial services typically charge fees rather than interest for their services, but the end result is the same – borrowing money has a cost. The big difference is that the cost from alternative lenders is often much higher than traditional banks and credit unions.

When determining whether or not these services are a good deal, it’s very important to understand how fees translate into equivalent interest rates. Let’s compare a short-term alternative loan to borrowing on a credit card, already one of the most expensive ways most people borrow money.

Say you need to borrow $200 for one month to pay a bill. If your credit card had a 29% interest rate, charging your $200 bill and repaying it in 30 days would result in a maximum interest charge of under $5. But, if you used a fee-based service like an auto title loan or payday-type loan, you could be charged a $30 fee for each $100 borrowed. So if the fee entitled you to one month’s use of $200, the loan cost would be $260 – equivalent to an interest rate of nearly 400%!

When using any financial service that primarily charges fees rather than interest, chances are you're not getting a good deal.