Savings accounts are an option, but watch out for the pitfalls
07/20/2013 11:06 PM
07/20/2013 11:07 PM
A forgotten savings account can cost you money. Banks can charge a fee for an inactive account after as short a time as six months or a year. Or, if your account drops below a specified minimum amount, a monthly service fee, typically $5, can be charged.
Since many savings account holders receive only quarterly statements, rather than monthly, the draining of the account can go on for a few months before you know about it. It’s another good reason to check your accounts online.
The savings account rules, possible fees and the low interest rates are enough to make many people wonder if putting their money under a mattress wouldn’t be better.
Despite such pitfalls, basic savings accounts remain an important way for most Americans to save, especially low-to-moderate income families, said Stephen Brobeck, executive director of the Consumer Federation of America.
Those who have no savings might take out a payday loan or run up their credit cards, which would be more costly, Brobeck said. Savings accounts, on the other hand, are accessible, affordable and government insured.
Almost half of all American families have either a statement or passbook savings account, and the median balance is $2,400. About 37 percent of low- to moderate-income families also have savings accounts, with an average balance of $800.
“We were surprised to learn that about half of banks don’t disclose the interest rates on their websites and that one-fifth of banks do not disclose their monthly fees,” Brobeck said.
The research revealed interesting differences between the savings practices of small banks and large banks. Large banks typically require a larger minimum balance, and charge higher fees and lower interest rates, but are more likely to disclose the information online and to offer innovative accounts.
Savings accounts under $500 to $1,000 are not profitable for most institutions, Brobeck said.
“Savings accounts pay ridiculously low interest rates, which is true of all risk-free savings,” Brobeck said.
CFA released a report recently about savings accounts. The research on 150 banks and 10 credit unions started with a review of their websites and was supplemented with calls to the institutions. To read the full report, go to consumerfed.org.
This analysis revealed:
Minimum Balances: There were great differences in minimum balance requirements to avoid monthly fees – 14 percent of the banks had monthly minimums of $25 or less, while 34 percent of the banks had minimums of at least $300. At half the banks, these minimums ranged from $200 to $300.
Monthly Fees: There were great differences in monthly fee amounts, with 30 percent of the banks charging $2 or less while 35 percent of the banks charged at least $5.
Fee Avoidance: Sixteen of the large banks waived monthly fees for savers who authorized monthly transfers, typically $25 or more, from checking to saving. A few banks waived fees for savers who also maintained a checking account.
Interest Rates: Almost all banks are using the low-interest rate environment as an excuse to pay very little interest. The 17 percent of banks paying 0.01 percent interest or less pay no more than 10 cents in interest annually on a $1,000 balance. And only four percent of the banks pay more than 0.25 percent on basic savings accounts.
In checking websites of Wells Fargo, Bank of America and PNC Bank, we learned that they each offer several types of savings accounts and the rules are different for each one.
Wells Fargo and Bank of America, for example, both offer accounts with no fees if a $300 balance is maintained. PNC requires a $400 average monthly balance to avoid a service charge.
As for inactive account fees, PNC states on its website that it can charge such a fee if an account is inactive for six or more months, but does not say what that fee will be.
AmericaNet bank, an Internet bank, charges a $10 a month dormancy fee after six months.
Most savings accounts have a limit on the number of withdrawals and transfers permitted each month, often that is three to six, before a fee is imposed. Wells Fargo, for example, charges $15 each time the limit allowed on the account is exceeded.
Many banks offer no-fee savings accounts to customers under 18. On the day your son or daughter turns 18, watch out. Most accounts are automatically and immediately subject to a monthly service fee. So, prevent that by making sure other fee-free options are in place.
Money market accounts offer slightly better interest rates than savings accounts, but also carry higher minimum balance requirements and higher automatic transfer amounts to avoid a monthly service fee.
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