Answer These Questions Before Picking a Bank in College

Opening a bank account is the first stop on the road to a successful financial future. No matter which direction you go, it all starts by making that first deposit. Just make sure you choose the right path first.

That means choosing the right bank. Here are some guideposts to help you make the best decision for your future.

Where to open an account

There are three main types of banks: traditional brick-and-mortar banks, online banks, and credit unions. The first include banks like Chase, Wells Fargo, and Bank of America. Online banks include Capital One, Simple Bank, and Ally. There are also local, regional, and national credit unions.  

All three will provide a debit card, paper checks, and access to online banking. Traditional banks and credit unions have local branches where customers can deposit checks, cash, and receive in-person assistance. Instead of relying on physical locations, online banks have mobile apps where you can deposit checks, transfer money, and check your balance.

Most traditional banks have lower interest rates on checking and savings accounts than online banks, because physical locations inevitably require more overhead expenses. They also usually have more fees and higher balance requirements than online banks.

“Certain banks will nickel and dime you if you’re not careful,” said Crystal Rau, CFP® of Beyond Balanced

In general, an online bank will take care of your banking needs as well as or better than a traditional bank. The only difference is that it may be difficult to deposit cash with an online bank. 

Like online banks, credit unions are another alternative to traditional banks – often with lower fees and higher interest rates than traditional banks. Most will have physical branches, but have lower fees and higher interest rates on savings accounts. Unlike banks, they’re not-for-profit organizations and have to distribute “profits” to their members in the form of higher interest payouts. 

If you work as a waitress or bartender and receive cash tips, you’ll need to deposit cash. In that case, you should open an account at either a traditional bank or a credit union with locations near you. Your college or university may have a credit union associated with it where you can open an account.

Research a bank’s fee schedule

There are three main types of fees to be aware of before choosing a bank:

Monthly account fees 

Banks may charge a monthly account maintenance fee, usually between $7 and $12. These fees can often be avoided by keeping a certain minimum balance, but this can be hard for college students to maintain. There are banks that waive this fee for college students.

Traditional banks are more likely to charge a monthly account fee compared to online banks or credit unions.

Overdraft fees 

If you charge a purchase to your bank account and don’t have enough money, the bank may approve the purchase and charge an overdraft fee. They’ll keep charging this fee every day until the account has a positive balance. 

Traditional banks usually charge higher overdraft fees than online banks and credit unions, often charging multiple overdraft fees per day. The average overdraft fee in 2019 was $33, so multiple fees could easily add up to hundreds of dollars over several days.

Credit unions and online banks are more likely to have lower overdraft fees and only charge one overdraft fee per day.

ATM fees

When you withdraw money from an ATM not affiliated with your bank, they may charge you an extra fee, usually around $3

Traditional banks are more likely to charge this fee, while many online banks and credit unions will reimburse you for using an out-of-network ATM. 

If you need to withdraw cash often, look for a bank with a large ATM network near you. Make sure those locations are places you can easily visit, especially if you don’t have a car.

You may also decide that having a large ATM network isn’t a priority if you rarely use cash. In that case, it may be fine to open an account at a bank with limited ATM options.

Open a checking and a savings account

There are two main types of bank accounts you can open: a checking account and a savings account. 

A checking account is used to store money for everyday expenses and regular bills. A savings account is where you keep money for long-term goals, like buying a new car or going on a spring break trip. Savings accounts have higher interest rates than checking accounts, so your money will earn more interest. In fact, most checking accounts don’t pay any interest.

Not all savings accounts are created equal, however. Savings accounts at traditional banks pay out far less in interest than online banks. According to the FDIC, the average interest rate on savings accounts nationwide is .06%. Many online banks and credit unions offer savings accounts with interest rates of 1% or more. 

If you have $1,000 in a savings account earning .06% interest, you’ll earn three dollars in the first five years. If you move that money to a savings account earning 1% interest, you’ll earn $51.25 in interest over that same time period.

“Opening and maintaining some sort of savings (no matter how small) is a critical exercise in developing healthy financial habits,” Elliot J. Pepper, CPA, CFP® of Northbrook Financial.

That difference might sound minimal, but it’s enough to treat yourself to a nice meal – and the contrast increases if you deposit more money into your account. It doesn’t cost any extra to have a high-yield savings account, so there’s no reason not to get one.

Should you get a credit card? 

Opening a bank account can teach you how to manage and save your money, but it won’t help you build a credit history. In most instances, a credit card is the best way to do that.

Before signing up for a credit card, make sure to find one without an annual fee. There are several student credit cards with no annual fees and cash back rewards on select purchases. You should also be wary of keeping a balance on a credit card. If you charge $2,000 to a credit card with 16% APR and only make the $60 minimum payment, you’ll pay $2,662.73 total by the time you pay it off in 45 months.

There’s a simple strategy you can use to build a solid credit score and avoid credit card debt. When you open the card, attach it to a small recurring bill like your Spotify or Netflix subscription. Don’t use the card for any other purchases. 

Set your bills to autopay every month, and make sure that the payment goes through. If you utilize this strategy, you’ll build a solid credit payment history without the risk of running up a balance you can’t afford to repay.

Finding the right bank shouldn’t be a strenuous process. When in doubt, choose an online bank or a credit union near campus. 

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