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Choosing an Account - Factors to Ignore when opening a bank account

Published by sam - 24/08/07 - 02:08:31 am

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Factors to Ignore

It is almost as important to recognize what factors are not worth considering as it is to know what factors are more important.

Gifts and Advertising Campaigns
Some of the less important distractions are obvious:  You should never open an account at a particular bank just because it offers free toasters, electric blankets, or other gifts as an enticement.  You shouldn’t choose a bank based on its advertisements.  Sometimes the ad will be overstated or will omit important details.

One large New York bank, admired in banking circles for its marketing ingenuity, ran an ad campaign focusing on providing instant cash for any deposited check.  What the ad copy failed to mention was that a depositor had to have other deposits at the bank – perhaps a savings account—to be able to get instant cash for a deposited check.  A hold is placed on those other funds, and they cannot be withdrawn until the check they’re covering actually does clear.

Yet another popular marketing omission involves the term free checking.  Bank advertisements often neglect to mention (or hide in fine print) the conditions of free checking, such as. “if certain minimum balances are maintained”.

Compounding Method 
Often, banks will make daily and continuous compounding seem of great importance to depositors.  The fact is, unless you have a five digit balance—something that is with rare exception, unwise for a checking account because your deposits can probably earn more interest in another financial vehicle—the dollar difference is insignificant.  Even on a $1,000 daily balance, 5 percent annual interest pays $51.16 over a year when compounded monthly and $51.27 over the same period when compounded continuously.  One must weigh the effort of searching for an account with continuous compounding against that extra 11 cents of interest. 

Interest Calculation Methods  
Some critics of banks warn that depositors should pay close attention to the way a bank calculates both the balance on an account and, based on that, the interest earned.  Various banks use a 366-, 365, or 360-day year when calculating interest, but again, the disparity in total interest earned amounts to only pennies.

However, one way of calculating interest due to the depositors, the low balance method, should be avoided.  It works like this: if you deposit $100 on April 1 and $10,000 on April 2, your interest for that month is based on the $100 not on the $10,100 because interest is paid only on balances that have been in the account for the entire month.  Banks used the low balance method in the past because it was easier to calculate the interest owed to depositors.  Computers have made this method outdated, but be sure to ask any prospective bank whether it uses the low-balance method.

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