Checking study: Bank fees still rising

Bankrate announce their annual checking study. The results seem somewhat at odds with another study reported recently. This confirms to me that the first thing to look at with any study is the sponsor, and their motivation.

Checking study: Bank fees still rising (Page 1 of 3)

Banking fees, balance requirements for checking accounts and ATM costs continue to rise while interest earnings on checking accounts do not, according to a Bankrate.com survey.

The key findings of the study are:

* Getting whacked with bounced-check fees can leave quite a welt on your wallet. The average bounced-check fee is $27.04, and with more banks using a tiered structure, the cost can quickly escalate.
* ATM surcharges hit a new high and are more prevalent than ever. The fee that banks charge to nonaccount holders now averages $1.60, with 98 percent of banks owning ATMs charging a fee.
* The average balance requirement on interest-checking accounts hit a new high of $2,465. And you’re not getting much in return, as interest-checking yields remain in the cellar.

Here is what Bankrate.com found in its latest survey, what it means to you and some solutions to save you dough.

Bounced-check fees
Bouncing a check results in a punitive fee from your bank, and the punishment is growing increasingly harsh. The average bounced-check fee increased from $26.90 to $27.04 since the fall survey, the second-highest ever recorded following the $27.13 average of one year ago.

The average bounced-check fee has increased with remarkable consistency since the twice-annual survey commenced in 1998. The first survey, in fall 1998, carried an average bounced-check fee of $21.57 and has increased about 25 percent since. Only twice in that time has the average fee failed to increase from one study to the next. Even Tiger Woods isn’t that consistent.

The increase in the average fee this time around is no fluke. The number of banks increasing bounced-check fees outnumbered those cutting fees almost 2-to-1. There were 39 increases but just 19 decreases.

But as Paul Harvey would say, “And now, the rest of the story.” The cost of bounced checks doesn’t stop after the first occurrence. In fact, it gets worse. Why? Increasingly, banks are employing a tiered fee structure for bounced checks. Under the tiered structure, the cost of bouncing a check can increase as additional checks fail to clear.

For example, since the last study, Wachovia Bank has introduced a tiered fee structure for bounced checks. The first check will cost $25, with the fee increasing to $30 each for the second, third and fourth checks, and anything beyond that is $35 each. Furthermore, Wachovia’s policy is typical of some other large banks, such as Bank of America and U.S. Bank, in that, when charging the fees, it counts all the occurrences during the past 12 months.

So while the cost of one bounced check at Wachovia decreased to $25 from the previous survey, the cost of bouncing more than one check or repeatedly overdrawing the account during a 12-month period is now higher. The account holder that rarely bounces checks may catch a break under the tiered structure, while more routine slip-ups come at a higher price.

So, how best to protect yourself from the ever-escalating cost of bounced checks? The first line of defense is to sign up for overdraft protection, preferably by linking a savings account to your checking account. Also, be particularly diligent about recording all of your transactions, especially if you favor the use of a debit card or have regular monthly payments automatically withdrawn from your account.

Any interest in interest checking?
How much interest do you earn from your checking account? If you have a typical interest checking account, not much. And how much of a balance must you keep in the account to avoid fees? For the typical interest-bearing account, a whole lot.

Rising interest rates over the past few years have done very little for the interest earnings of checking customers. But hey, maybe it isn’t really that bad. After all, the average yield on an interest checking account is now the highest in three years.

Of course, this three-year high is just 0.32 percent, up from a trough of 0.26 percent two years ago. Not much improvement considering the Federal Open Market Committee has boosted short-term interest rates from 1 percent to 4.75 percent since June 2004.

The incongruity of it all is that the average balance required to avoid fees on an interest checking account has hit a new high of $2,465. In the past two years, the average balance required to avoid fees has increased 18 percent. So you deposit more, yet don’t earn appreciably more.

And what happens if you don’t maintain that hefty balance? The monthly service fee on an interest checking account currently averages $10.85, up slightly from $10.81 in the fall.

To avoid the landscape littered with onerous fees and insurmountable balance requirements, look at noninterest accounts instead. Noninterest accounts require balances that are a fraction of those required on interest checking accounts. The average amount required to open a noninterest checking account is just $72, compared to nearly $430 needed to earn interest.

Avoiding fees requires little more than one-tenth that of an interest account, with the average just $266. And what if you slip below that balance and incur a monthly service charge? It’s not nearly as big a deal, with the average fee of $2.80, roughly one-fourth the fee charged on interest accounts.

One of the routine findings of Bankrate.com’s checking study is that interest checking accounts are, by and large, a lousy deal. So is it preaching to choir to point out this fact once again?

Not according to Forrester Research. The company recently found, in a survey of online households with more than $10,000 in liquid assets, that 52 percent of households hold half or more of those liquid assets in a checking account. This is a horribly inefficient deployment of cash in an environment when the highest yielding money market and savings accounts carry returns exceeding 4.5 percent. The additional interest earnings attainable by switching to a free noninterest account, then devoting that $5,000 balance to a higher-yielding money market account, is $209 per year — without surrendering any access to cash!

ATM fees
ATM surcharges have soared more than 20 percent in the past two years, with the average surcharge rising from $1.32 in early 2004 to a record $1.60 now. Since the fall 2005 edition of the survey, 17 institutions raised surcharges, while just four reduced the fee.

There has also been a sharp increase from one year ago in the prevalence of ATM surcharges, with Washington Mutual’s reinstatement of ATM surcharges in the fall study being the primary catalyst. Among the institutions that own ATMs, 98 percent now charge nonaccount holders for access, up from 89 percent two years ago and 91 percent one year ago. The bottom line: If you use another bank’s ATM, expect to pay (and pay more) for the privilege.

There is some good news on the ATM-fee front, however. The fee banks charge their own customers for using another bank’s ATM dropped off notably since the last survey, with the average falling from $1.37 to $1.29. In contrast to the pervasive ATM surcharges, the prevalence of banks charging their own customers for using other banks’ ATMs has plummeted from 89 percent one year ago to a new low of 81 percent today.

Again, Washington Mutual is leading the charge, introducing a free checking account that does not charge for withdrawals from other banks’ ATMs. This softens the blow for consumers accustomed to encountering two fees when using another bank’s ATM. However, shop carefully as this consumer-friendly policy remains a rare find at banks and even then, only pertains to certain account offerings, not all accounts offered by those banks.

It is important to find an account that meets your needs, even from the perspective of ATM fees. Even with a more permissible fee policy for customers that use nonbank ATMs, the sting of ATM surcharges can still make withdrawals from other banks’ ATMs a costly endeavor.

So just how costly can ATM transactions be if visiting another bank’s ATM? Using some General Accounting Office data, Bankrate.com estimates American consumers will pay a total of $4.2 billion in fees for nonbank ATM withdrawals in 2006. And this is just for actual withdrawals, not for balance inquiries at ATMs that may result in a fee even if no transaction takes place.

However, the total cost estimate is actually down slightly from the 2005 estimate of $4.3 billion, with the good news of fewer charges by your bank outweighing the higher fees paid by nonaccount holders.

The easiest, and most obvious, way to avoid ATM fees is to manage your withdrawals so that you only make withdrawals from your own bank’s ATMs. But let’s face it, that just isn’t practical 100 percent of the time. Fortunately, there are backup plans, such as getting cash back during a point-of-sale transaction when using a debit card. If you are a customer of a smaller bank or credit union with a very limited ATM network, investigate whether they belong to a surcharge-free alliance that permits use of any member ATM without additional fees.

Internet bank instead?
Is a checking account at an Internet bank a suitable alternative to the fees and balance requirements of traditional banks? If your heart is set on an interest checking account, perhaps so.

It will take a larger initial balance to earn interest at an online bank, $605 compared to the nearly $430 prevailing at brick-and-mortar banks. But the hurdles become easier to clear after that. The average balance required to avoid fees on interest checking accounts is only half as bad at Internet banks, $1,250 versus the $2,465 required at traditional banks. Even the average monthly service fee is approximately half, running $5.50 at Internet banks versus $10.85 at traditional banks.

In exchange, you’ll be able to sink your teeth into higher interest earnings. The average yield at Internet banks is 1.96 percent, dwarfing the 0.32 percent at traditional banks. However, even this return is not enough to warrant maintaining a large balance, as the 1.96 percent yield trails the current inflation rate of 3.6 percent.

For highlights of the checking survey, see the related charts