When you’re looking for a new bank account, you want to get a good deal. It makes sense to pay attention to specials and promotions if you’re switching accounts anyway, but sometimes those deals aren’t as good as they seem.
Bank advertising departments know that you’re busy and that you probably never received formal education on financial topics. Some even try to take advantage of those conditions to trick you into opening an account.
Here are six gotchas to watch for when you evaluate banks. A bit of scrutiny can help you avoid getting stuck in a disastrous long-term relationship as well as feelings of disappointment with your bank. If banks are “less than forthcoming” about their services, what does it say about the bank’s advertising and management teams? You don’t want to have to second-guess everything your banks sends you.
Sky-High Savings Rates
Especially when interest rates are low, it’s tempting to move to a bank that pays high rates on savings accounts. But the devil is always in the details.
For example, a bank in New York’s Hudson Valley promoted high-yield checking accounts paying 4 percent annual percentage yield (APY) while most online banks were paying less than half of that. But the bank only pays 4 percent on the first $1,000 in your account—and the remainder of your account earns just 0.15 percent. If you only keep $1,000 in checking, you’ll earn a nice $40, but that’s hardly worth the time and energy it takes to switch bank accounts and update all of your online bill payments.
Reward Checking Accounts
Reward checking accounts pay high interest rates on checking balances—sometimes on balances as high as $25,000. But there’s a catch. To qualify for that interest rate, you need to jump through some hoops. If you fail to do so, you earn much lower interest rates, and you might be better off leaving your money in an online savings account.
For example, reward checking accounts typically require you to meet rigorous criteria:
- Use your debit card at least 12 times per month (and sign, instead of using your PIN).
- Sign up for paperless statements.
- Log in to your account at least once per month.
- Have at least one payment added to your account by direct deposit each month.
- Pay at least one bill using the bank’s online bill payment service.
That’s a lot of work, but it can pay off if you’re up for the challenge.
Let Us Help You Grow Your Business
When you’re starting a business, extra funding is always handy. You’ll receive numerous offers for business credit cards and small business loans after you register a business, but don’t be surprised if you have to make a personal guarantee with those loans.
Unless your business has significant assets to pledge as collateral (or a long history of profitability), banks won’t actually lend to your business. Instead, they put your business name on loans and credit cards—but they’re really lending to you individually. Banks look at your personal credit scores and income to determine your creditworthiness, and you usually sign an agreement taking personal responsibility for your business loan (it doesn’t matter if your business is incorporated). You might even have to pledge your home as collateral. If you default on the loan, your credit will suffer, and you may also lose your home in foreclosure.
We Have the Lowest Loan Rates
Lenders are required to follow strict laws when advertising, but that doesn’t mean you should believe everything you see. When you see a low interest rate, you may find that the rate is not available to you—or that rate isn’t available with the terms you want.
Lenders put their best foot forward when advertising, but several factors can result in a higher rate on your loan:
- Lower credit scores mean higher interest rates. The best rates are typically available for those with FICO scores above 740.
- A small down payment (anything less than 20 percent) may lead to a higher interest rate. By putting down more, you minimize costs in several ways.
- Cash-out refinancing can raise your rate by increasing lender risk.
- “No closing cost” loans have higher rates. For the lowest rate possible, you may need to pay for closing costs out-of-pocket (which isn’t necessarily a bad idea).
Liquid CDs: Cash Out Anytime
Certificates of deposit (CDs) often pay higher interest rates than savings accounts, but you need to lock up your money for several months or several years. But some banks offer “liquid” CDs that allow you to pull funds out early. Those products provide flexibility, but it’s critical to understand how they work.
Before using a liquid CD, evaluate the pros and cons.
There’s no such thing as a free lunch. Because liquid CDs provide flexibility, they typically pay slightly lower rates than standard CDs. The tradeoff may be worth it—just verify before you buy.
It may be true that you can withdraw from a liquid CD with no early withdrawal penalty, but you probably don’t have total freedom. Find out how much you can take at any given time, and whether or not you need to wait before your first (and any subsequent) withdrawals.
Courtesy Pay: Never Be Embarrassed Again
Most banks offer overdraft protection plans, which allow you to spend with your debit card even when your checking account runs out of money. Advertising materials might highlight how you can avoid shame at a supermarket or restaurant when your card is declined. But you might decide that a little embarrassment (if you even think it’s embarrassing—it happens all the time) is a small price to pay compared to overdraft charges.
Instead of paying full price—often $35 or so—for overdraft protection, you can use other strategies:
Overdraft protection is optional. If it’s already included with your account, you have the right to right to remove it. Just tell your bank to turn off overdraft protection. If you try to spend more than you have, merchants will simply reject your card.
Overdraft Line of Credit
Some banks offer overdraft lines of credit as an alternative to charging flat fees when you overdraw your account. The line of credit is a loan based on the excess you spend, and you only pay interest on the amount you borrow. In many cases, you only go over by a few dollars, so the interest charges are negligible.
Transfer From Savings
Another option is to have your bank move the money you need from your savings account. Banks typically charge a fee for this, but it tends to cost less than a standard overdraft charge.
Read the Fine Print
The best way to learn about what you’re buying is to actually read the information banks provide to you. That means going beyond the sizzle and understanding exactly how their products and promotions work. Pay attention whenever you see an asterisk (“*”) or a pile of fine print at the bottom of a web page—you’ll find valuable information there.