LEVEL SIX

Break Up with Your Bank

I logged in to my bank account and felt a punch to the stomach. I’d never seen a number that low. My account balance, in bold red type, had a strange little minus sign in front of it. After that minus sign, $300. How did this happen?

I rarely spent more than $10 on anything that wasn’t rent, tuition, or books, but somehow, I had accumulated hundreds in overdraft fees overnight. At the time, $300 might as well have been $300,000. I simply didn’t have the money for that, and since my account balance was in the red, I didn’t have money for rent, either.

Upon further digging, I discovered my bank had done something interesting. (A better word for it would be sneaky.) They ordered my daily transactions to prioritize debits over credits. In other words, they made sure to post any credits, like direct deposits, only after I spent money. This would encourage me to overdraft if I bought anything that day, even lunch at McDonald’s, creating a downward spiral of overdrafting that led to an account balance of–$300. A 2014 Pew survey found that almost half of banks reorder transactions to boost overdraft fees in this way.¹⁸ Other banks take this shady practice a step further and open lines of credit on their customers’ behalf. The bank will then use that line of credit to pay for the overdraft fees, but meanwhile, the customer now owes interest on a loan they may not even realize exists to pay for fees that should have never existed in the first place.¹⁹ It’s sort of like pushing someone off a boat, then throwing them a life preserver that’s actually just a sack of bricks.

It appears that, despite the class action lawsuits banks occasionally face for this practice,²⁰ tricking customers into paying overdraft fees is a lucrative business. Only after I spent hours on the phone with my bank and threatened to close my account did they refund my fees “as a courtesy.” Oh, how polite! At the time, I thought this type of treatment was normal. If you’ve dealt with the same bank for years, you might assume they’re all alike. You might think they all charge the same ridiculous fees or have the same awful customer service. You might not think it’s worth jumping from one bad bank to another. Not all banks are the same. Not all banks set their customers up to fail. If your bank gets in the way of managing your money, it’s time to explore other options.

SIGNS IT’S TIME TO LEAVE YOUR BANK

Like a bad relationship, many people stay with a bad bank because leaving seems too hard, or maybe they’re just not sure if there’s anything better out there. With so many choices and alternatives available these days, you probably have more options than you think. There are tools that can help you find a trustworthy financial institution to begin with, and we’ll get to those, but first, here are a few red flags it’s time to dump your bank.

Fee creep: Maybe your bank starts charging a monthly maintenance fee, or maybe they introduce a fee for mailing you a statement. Some banks will also raise the minimum balance threshold on accounts so that if your balance falls below the minimum, you’ll pay a monthly fee. So how can you tell if your bank is getting creepy with the fees? Banks are legally required to send out a new fee schedule any time they update these terms, so pay attention to any correspondence from them so you’re not caught off guard. If your bank is guilty of fee creep and you’re literally paying to keep your money with them, it might be time to switch.

Customer complaints: After my overdraft experience, I researched the issue and found that many other customers complained about the exact same thing. Take a minute to look up reviews of your bank online. At the Consumer Financial Protection Bureau’s (CFPB) website, cfpb.gov, you’ll find a complaint database where you can browse specific consumer complaints for a number of banks and credit unions. If other customers at your bank are complaining about the same thing, it’s usually a red flag that the bank is up to no good. It may be time to jump ship.

Awful customer service: Maybe your bank refuses to waive a bogus fee even out of “courtesy,” or maybe you have a hard time getting ahold of a human being when you contact them. Either way, if your bank’s customer service is terrible, they don’t value your business and it’s time to move on.

Monthly transaction limits: You should be able to transfer, withdraw, or deposit money between your checking and savings accounts as much as you want without incurring a fee.²¹ If your bank charges you to transact, it’s probably time to switch.

Limited or inconvenient access options: Most financial institutions (credit unions included) have stepped into the twenty-first century with plenty of online services. You should be able to do all the following online or through your bank’s app: pay bills (without a fee), transfer money, chat with a representative, order new checks, and deposit checks. A lack of online convenience won’t be a deal-breaker for everyone, but if you’re frustrated with your bank’s limitations, just know there are plenty of other options.

OTHER BANK FEES YOU SHOULD KNOW ABOUT

Oh, it doesn’t end with overdraft fees. Banks charge all sorts of other fees, too. The following fees aren’t deal-breakers, as most banks include them, but you should still be familiar with these fees:

Note: Many credit cards don’t have foreign transaction fees, so you can use them while you’re abroad instead (just make sure to pay off your balance in full and on time when you get back).

GET MONEY CHALLENGE #3: Fight Back!

WHAT YOUR BANK SHOULD OFFER, AT THE VERY LEAST

Once you know it’s time to move on, make sure your new bank (or credit union—we’ll get to that in a bit) is better than the last. We’ll get into some of the best amenities banks offer these days, but first, the basics. There are a few must-have features any legitimate bank should offer, no matter what.

Insurance: At the very least, your bank should be FDIC insured. This means that, in the event of a bank failure, zombie apocalypse, or whatever, the Federal Deposit Insurance Corporation (FDIC) will insure your money, usually up to $250,000 per depositor. Credit unions are insured by the National Credit Union Administration (NCUA). Chances are, your financial institution is covered, but you can check a bank’s status on the FDIC website (fdic.gov) and a credit union’s on the NCUA website (ncua.gov) just to be sure.

Online security: Any bank should have measures making it safe to transact with them online. Most banks offer two-factor authentication, which means you go through an extra step to verify your identity in order to protect your accounts when you log on. The bank should also code your transactions with 256-bit or 128-bit encryption, which codes your info to prevent hackers from accessing it. There are always exceptions to the rule, but for the most part, online banking is safe, as long as the bank offers both authentication and encryption.

Fraud protection: You also want to ensure your bank offers protection against fraud. Most banks have a blanket policy that says you’re not liable for unauthorized purchases as long as you report those purchases within a certain time frame.

Overdraft protection: Rather than encourage you to overdraft, a good bank helps you avoid it altogether with a solid overdraft protection policy. Many banks now allow you to link your savings account to your checking so that, in the event of an overdraft, they’ll pull from your savings instead of slapping you with fees. Some banks will charge you another frustrating fee for using overdraft protection, making it pointless in some cases. It’s rare, but some banks will offer free overdraft protection. Most banks at least alert you when your balance dips below a specified amount.

These are the basic features any bank should offer, so don’t think of them as perks. Any bank worth your time and money should offer these as a standard. If they don’t, start looking elsewhere.

PICK A BETTER BANK

Now that you know the basic features of a bank that doesn’t suck, how about finding a bank that’s actually, I don’t know, good? Think about the bank features that matter to you most. If you’re a world traveler, it might be free ATM access. If you’re a busy person who craves convenience, it might be online banking. If you hate the idea of banking online, it might be important to you to have access to brick-and-mortar locations. Some other bank features to consider:

Once you know what you’re looking for, you can narrow your search. So go ahead, list your top banking priorities:

There are websites that can also help you look for banks, choose features that are important to you, and compare those features with other banks so you can pick the right one (Bankrate, NerdWallet, and MyBankTracker, to name a few). These sites are a good place to start your search, and you can also filter banks by feature, customer reviews, and location.

FINE PRINT: WHAT TO LOOK OUT FOR

Once you find a bank that looks promising, it’s time to look at the fine print, and you can easily do this online. The bank’s website should include terms for each type of account it offers. If you’re talking to a teller in person or a bank representative on the phone, just ask them about these terms directly, or ask them for a term sheet. So what should you look for in the terms?

First, make sure the bank doesn’t charge a monthly maintenance fee or require a minimum monthly balance. If they do require a minimum, at least make sure you’re aware of what that amount is (and make sure you can meet that requirement every month). Of course, look for the fees mentioned in the previous section, too.

Also, check the bank’s transaction limitations. Some may charge you for exceeding a certain number of transactions every month. Savings accounts are federally regulated to only allow six ACH (Automated Clearing House) transactions a month, and these are essentially any preauthorized or automatic withdrawals from your standard savings account. Beyond that, though, you should be able to withdraw, deposit, or transfer money between your accounts as you please without being charged for it. Some banks will charge a penalty if you exceed the federal limit for ACH transfers, and some may either shut down your account or switch it from a savings to a checking account.

Once you find the right bank and research their reputation and fees, it’s time to apply. Most institutions let you fill out an application online. Of course, you can always do this in a branch, too. You’ll enter your personal information, select the kind of account you want and how you’ll fund it, and the branch will review your application to decide whether to approve you. Use the checklist here to help with your switch.

The Case for Online-Only Banks

With an online bank, everything is done online (obviously), either through your desktop browser or a mobile app. You never walk into a branch, deal with tellers, or wait in line to deposit checks. It’s an introvert’s dream! Online banks have one big advantage over regular, brick-and-mortar banks: they have fewer overhead costs, so they can afford to offer customers better interest rates on their accounts. Plus, online bank fees are usually much lower. The problem is, a lot of people are skeptical about doing all their banking online.

First, many people assume online-only banks aren’t safe. You never deal with a person, which makes the experience seem kind of scary. However, a good online-only bank offers the same security and protection as any other bank, including:

Most online banks have their own solutions for traditional banking services, too. For example, if you want to deposit cash, traditionally, you’d go into the bank and talk to a teller. With an online-only bank, you can usually deposit cash at any ATM in the Allpoint network (there are more than 55,000 worldwide). Of course, if you just need to deposit checks or transfer money, you can do that online or with the bank’s app. You can also withdraw money from any ATM, too, and most online banks will reimburse your fees. What’s more, most online-only banks have 24/7 customer service via phone, e-mail, or chat.

Some online-only banks do have lower withdrawal limits, though. For example, you might only be able to withdraw $1,000 per day from an ATM. Some banks will allow a temporary increase if you give them a call.

The Case for Credit Unions

Since consumers have turned a skeptical eye to banks in recent years, credit unions have become an increasingly popular option. You’ve probably heard of them, but you might not be sure what they’re about.

Unlike banks, credit unions are not for profit. That isn’t exactly to say they don’t make money. However, banks certainly have a goal to create profit for their stockholders, and since credit unions don’t have stockholders, their goal is less about profit and more about serving the community. Credit unions have a democratic history, as the first among them were established as cooperatives—the people who kept their cash in the credit union also helped manage it. And they still operate this way today. Instead of customers, they have “members.” When you open an account with a credit union, you become a member, which makes you part owner, which basically means you’re allowed to vote on their board of directors. They’re typically more lenient with the application process, too, so if you have poor credit and you can’t open a decent account at a bank, you might want to give a credit union a try.

A lot of people think it’s hard to join a credit union because membership is limited to a select field or location. “It’s actually quite simple to join a credit union because most exist to serve the people in their community, not just a specific group,” says Samantha Paxson, chief marketing and experience officer of CO-OP Financial Services.

It’s true that many credit unions are industry specific, like the Firefighters First Credit Union, for example, or the Pentagon Federal Credit Union (PenFed). At the same time, these credit unions often allow outsiders to join by making a small donation to a charity. For example, while PenFed is meant for United States military or Uniformed Services and employees of the U.S. government, anyone can become a member with a one-time donation to either Voices for America’s Troops or the National Military Family Association. What’s more, there are credit unions that cover entire regions and anyone living in a certain state or region can become a member.

Contrary to popular belief, most credit unions are convenient, too. They’ve done a pretty good job of keeping up with technology and most of them offer online banking and mobile banking, just like any other financial institution. Of course, you should check with a specific credit union to see what they offer, and at www.ASmarterChoice.org, you can browse and compare them.

Credit unions also make a point of providing financial education and counseling to their members. “This is a function of the historic charter of credit unions—which remains true to this day,” Paxson says. “They are not-for-profit institutions that exist to maximize service to members, and not maximize profits for shareholders.”

WHAT TO DO IF THE BANK REJECTS YOU

Just because you find a great bank doesn’t always mean you’ll get an account. If your banking or credit history is iffy, the bank could reject your application. With most other financial products, like credit cards and loans, those companies use your credit report to gauge your creditworthiness, but it works a little differently with checking and savings accounts.

For bank accounts, financial institutions use an entirely different report called ChexSystems. ChexSystems is a consumer-reporting agency that issues a report detailing your consumer banking history. If you’ve had any overdraft fees or bounced any checks, it’ll be on your ChexSystems report. About 80 percent of banks and credit unions use this agency when reviewing applications. If you’ve been rejected, it’s likely that your ChexSystems score isn’t so hot.

Not to worry, though. You have options. First, you can get a copy of the report yourself and dispute any negative items on it. You can request your report directly at the ChexSystems.com website, and if you think there’s an error, you’ll either contact them or the financial institution directly. ChexSystems keeps negative items on your report for five years.

Your better bet, though, is probably going with a different bank—or, better still, a credit union. Many smaller, regional banks and credit unions have “second-chance checking accounts” for people with a less-than-stellar banking history.

MAKE THE SWITCH

Once you’ve found the bank or credit union that’s right for you—and you’ve been accepted—it will be time to make the switch. It only takes a few steps to make the switch as seamless as possible, but each step is important. The last thing you want is to close an account at one bank only to have it resurface again thanks to an errant automatic bill payment. This can happen, but if you follow the right steps, it’s easy to avoid these kinds of mistakes. At the end of this section, you’ll find a checklist you can use to ensure you don’t miss a step.

Step One: List Your Bills and Search for Pending Transactions

If you move your funds over to your new bank while you still have unposted checks and scheduled payments at your original bank, you could rack up some costly fees. Your car payment is due, the lender tries to debit your old account but there’s nothing there, and now you have an overdraft fee, a returned check fee, or whatever other penalty your bank imposes. Yikes.

To keep this from happening, scour everything and make a list. First, look at your transactions from the past year and make a list of all automatic bill payments. Don’t forget the irregular, quarterly, or bimonthly payments, either. Once you have all your automatic bill payments listed, search online for pending transactions (or call your bank and ask if there are any pending transactions on your account). This includes checks you’ve written that may not have been cashed yet.

Step Two: Open Your New Account, but Keep Your Old One Open, Too

Don’t close your old account right away after you’ve opened your new one. Keep it open for a few months, in case there are any transactions you may have missed. If possible, stash a small amount of cash in your old account during the transition, just in case there’s a lingering check or automatic payment you’ve forgotten about. Also, order checks from your new bank and ensure your new debit card is on its way.

Step Three: Update Bill Payment Information

Remember the list of automatic payments you made in Step One? Now’s the time to use it. Update all those bill payment accounts with your new bank account number. If you can, cancel any scheduled payments coming from your old bank and redirect them to your new one. If you have any payments already in progress, make sure you have enough cash in your old account to cover those bills.

Ask your employer to update your direct deposit info, too. Most of them will just have a form you can fill out and return. Ask if the switch will happen during the current pay cycle or the next.

Step Four: Close Your Old Account

Before you close your old account, check the following:

Once you’ve verified all of the above, it’s time to close your old account. Depending on your bank’s protocol, you might have to call, send a letter, or visit a branch in person. Keep records of all your correspondence. Some banks will charge you to wire your remaining funds to your new bank. To avoid this, you can set up an electronic transfer, write yourself a check, or just withdraw the money in cash at a branch.

KILL YOUR ZOMBIE BANK ACCOUNT

Zombie accounts are real, and they’re scary. Bank accounts can automatically reopen if there’s a deposit made into the account after it’s been closed. Your old account could incur monthly maintenance fees, racking up hundreds of dollars in penalties without your even realizing it. Even when you think it’s dead, your crappy old bank account can come back to haunt you. Hence, zombies.

This is why it’s crucial to verify your direct deposit switch before you close your old account. Shit happens, though. Maybe there’s a glitch or some other random payment you forgot about. Check your old account regularly for the next year or so just to make sure it hasn’t risen from the dead. Every few months, check to see if your account has reopened by contacting the bank itself or trying to log on to their online banking site. If your old bank account has indeed come back to haunt you, you’ll have to contact the bank directly and ask them to close the account and waive the fees. If you still have the signed document that verifies your account closure, that’ll make the process a lot easier.

One more in the books. You set out to optimize your finances, and a big part of that is finding a financial institution that has your back. Because if your money is going to work for you, your bank has to, too.

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