Choosing the Right Local Bank

When you are choosing a local bank, you are looking for the institution that is going to come through for you in the way that you need.  Unfortunately, too many people choose their bank based on where their parents bank, or which bank has an office in the lobby of their building.  Even worse, is picking the bank that has an ATM next to your favorite restaurant or bar.  Just because you've been a customer at your bank for a lot of years is no excuse not to see what else is out there.

With all the online banks and brokerages and credit card companies offering banking, why bother with a local bank?  Well sooner or later, you're going to need someone to notarize something.  Or a local car dealer is going to want to call and verify your banking information without going through a 15 minute 1-800 number system (he darn sure isn't going to check you out online!)  Trust me; Just keep reading and you'll find out all about Internet banks (you're going to want one of those too.)

So, what should you be looking for in your local bank?  The same things you look for in any professionals you choose to work with.  You want the bank that charges you the least while providing you all the high quality services and products you need.  If you need business checking, then the bank you choose needs to offer business checking.  Ditto on trust services, ATMs, check cashing, and so on.

I keep saying bank here, but as many of you know, Credit Unions can be better alternatives to banks.  However, just because it says Credit Union on the building doesn't mean its the right bank for you.  Here's how to choose.

-- A short reality check here.  If your credit is terrible and you have a history of bouncing checks, you probably just have to take what you can get.  But, if you are an average American, then this is your checklist.


Your bank has to have these. NO excuses.
  • Free Checking
    • Real Free Checking, Not Fake Free Checking.
    • What is Fake Free Checking?  Free checking for one year is Fake Free Checking.  Free checking as long as you have an outstanding loan, or a CD, or another product is Fake Free Checking.
    • Real Free Checking has no monthly fees of any kind.
    • Real Free Checking means it is free no matter how many checks you write.
    • What about a minimum balance requirement?  Keep in mind there are plenty of banks and credit unions around who will give you free checking with no (or very low) minimum balance.  However, if the minimum balance is lower than you EVER go in your checking account then it's ok.  Some banks just don't want to deal with people who try and write a $20 check when they have $4 in their account and are hoping their direct deposit will hit before the check clears.  There is nothing wrong with that.  Hey, you're not that kind of customer, right?  If the minimum balance is a never-worry-about-it amount, then don't worry about it.  If it is higher than that, find another bank.
    • A word about free checks.  Free checks are a little bit like free shipping.  It's nice if you can get it, but you shouldn't expect it.  If the account is good on everything else, then don't worry about paying for your checks.  After all, if you follow the advice you get here, you won't be writing many checks anyway, so you'll go a long time between orders.
  • Free Overdraft Protection of Some Kind
    • Whether you get a free line of credit (Free to have an open, not free to use.  Expect to pay interest if you use it.). Or Free Automatic Transfers of money from your savings account.
    • This is more important than higher interest rates.
    • The average overdraft (bounced check) fee is close to $40 which would wipe out an entire month's worth of interest on $10,000 earning 5%.  No matter how careful you are, someday you'll be on vacation while a once a year payment hits your account the day after your mortgage payment. 
    • With Free Overdraft Protection you can keep more money in your money market account earning higher interest without worrying about bouncing a check.
  • Free Online Banking
    • Look, it's 2008. Everyone and their dog is offering free Internet access to your accounts.  Your credit cards, your utilities, your mortgage, your cell phone, your cable company.  If your bank is still trying to nickel and dime you by charging you for Internet access, you can be sure they are looking to ding you with other fees at every turn.
    • Free Online Banking includes free INSTANT transfers between accounts.  To bank smart you'll need to be able to transfer money from your money market account to your checking account.  If you have to pay for this or wait 3 business days, find another bank.
    • Free Online Banking also includes the ability to view images of your cancelled checks.  There is nothing more reassuring than looking at that strange $182.28 check you don't remember and then clicking to see the image and being reminded about the gift you bought for your sister's birthday last month.
  • Free Access to Real People (Teller or Phone)
    • Sometimes you have to talk to a real person, and you shouldn't be charged for it.  If you have a problem and need to talk to a teller or a live person on the phone, you don't want to be weighing the choice between the cost and getting your problem solved.  If they charge you to get the customer service you deserve, then they don't believe in customer service move on.  (If there is a discount, or bonus for being maintenance free, that's fine.)

Forbidden - Your Bank CANNOT Have Any of These

If your bank has any of these it's time to find a new bank.
  • Monthly Fees or "Service Charges" or Account Opening Fees
    • Plenty of banks want your business.  They won't make you pay to belong.  The only acceptable fee for just having an account is if you have to join a Credit Union.  That fee should be very low and it should be a one time fee, not recurring.  (A fee over $10 should make you wonder if this is a good Credit Union, or just another fee charging bank in sheep's clothing.)
  • Transfer Fees (except as required by law)
    • The law limits you to 6 free transfers from a savings type account to a checking account per month.  You can thank the politicians who sold out to the banking industry's lobbyists for this rule.  Still, 6 transfers is plenty if you are planning ahead at all.  It's more than one a week.  Six is the maximum, but your bank can lower the number if it wants to.  If it does then they aren't looking out for you, they are looking to generate fees.  You should be looking to find their competitors.
  • ATM Fees or a Monthly Fee to Have an ATM Card
    • This isn't the same as the owner of the ATM charging you a fee. That isn't your bank's fault.  (Though you should avoid this whenever possible.)
    • Your bank should not charge you to use ATMs -- ANYBODY'S ATM. If your bank is charging you $1 per non-owned ATM or worse, check around.  Chances are there is bank down the street that doesn't.
    • There is no reason you should have to pay a fee of any kind for your ATM card.  Lots of banks will gladly offer you one for free.

Best Features

If there is more than one bank on your list that passes everything above, then use these as a tie breaker.
  • Free Credit Score or Credit Reports
    • You can easily get your credit report for free every four months (click here to read about it), so this should not be a deal killer, but it is nice.
    • A Free Credit Score is very different from a free credit report. You can get free credit reports very easy. Free credit scores are much harder to come by and therefore a much bigger deal. You'll see people chatting about whether you get a "real" FICO score, but it isn't really important. What you need is a way to monitor the changes in your score, not the actual score. There isn't really anything you can do about the score, but it is very nice to know whether or not that Sears card you opened last month helped or hurt your credit score.
    • If you find a bank or credit union that passes both lists above and offers a free credit score (updated at least monthly) then please email me. I'd like to open an account there too.
  • Online Bill Pay
    • Ideally you want this to be free.
    • Read about how to manage your cash flow here and you will see that you want to setup as many of your recurring monthly bills as possible up on automatic payment plans. Not only will you never pay another late fee, but you'll save time, money on stamps and money on checks (they usually aren't free).
    • You will probably want to use a different account to pay most of your monthly bills so this isn't a must. But, if the need arises, it is nice to know it is there.
  • Free Checks
    • I know I said free checks wasn't a deal breaker, and it still isn't, but saving some money is saving some money. So all things being equal, take advantage of it.
  • Download Your Records to Quicken
    • If you use Quicken or other software to manage your finances, it is nice to be able to electronically download to your program instead of typing everything in.

If you follow the list above, you're probably headed in the right direction. Just keep in mind that a bank that charges you an extra fee that you notice, probably charges another dozen that you haven't noticed yet (and probably won't won't until they ding you with it.) There are two kinds of banks. Those that try and maximize profits with fees and penalties, and those that try and maximize their profits with banking products. You obviously want the second kind.

No checklist is substitute for good judgement. If the employees don't seem helpful or happy, try somewhere else. If they aren't helpful now while trying to get your new business you can imagine what they'll be like when they already have it. Talk with friends and relatives. Find out more than if they like their bank. Find out WHY they like it. If they rave about the service that is a good sign. If they like it because their ATMs are nearby, that isn't as helpful.

Good luck. Feel free to email me your questions, or post them over in the blog.