Checking study: Bank fees still rising
By Greg McBride, CFA . Bankrate.com


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.
Bankrate.com's semiannual checking survey looks at the checking accounts and
corresponding ATM fees by the largest banks and thrifts in each of the 25
largest markets nationally. Bankrate.com surveyed 248 banks offering
checking accounts, looking at 462 accounts -- 247 interest and 215
noninterest. Bankrate.com then compared them to a sampling of checking
accounts available at Internet banks.
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.