Are you thinking about opening a checking account that has a complicated-sounding minimum balance? Did your checking account’s terms just change? Let’s clarify the different kinds of minimum balance requirements banks and credit unions put on checking accounts.
Banks and credit unions profit from the checking accounts they offer by either by re-investing your deposits (lending) to earn interest income and through fees like a monthly service fee. To avoid a monthly service fee, you must either keep enough money in the account or pay the service fee for each month-long statement cycle when you don’t meet the minimum balance requirements. But institutions calculate these balance requirements different (of course). Find yours below:
If an the fine print indicates only “minimum balance,” with no other description, it’s safe to assume the balance restrictions on this account are high. At no time during the statement cycle can your account balance drop below the specified amount. For example: John’s account is listed as having a “$300 minimum balance.” He will be charged the full monthly service fee if his balance goes under $300 at any point that month, even by a penny.
You keep a balance much higher than the minimum balance required.
You just barely meet the balance requirement.
Minimum Daily Balance
This is how most checking account balances are measured. Your balance may drop below the required amount at any time as long as you meet the balance requirement at the end of the business day (usually 5 pm). For example: Tracy has a checking account with a “$500 minimum daily balance.” One day she makes purchases that drop her balance down to $200 but then deposits a $400 paycheck before the end of the day. The bank won’t charge her the service fee because her final balance that day is $600.
You deposit money into your account on a regular schedule.
You deposit money into your account irregularly.
Minimum Combined Balance
You must keep a certain amount of money deposited in the bank or credit union, but it can be distributed across many or all of your accounts. Depending on the account requirements, these additional accounts may include savings and money market accounts, IRAs and even lines of credit. It all depends on the specifics of the checking account with the minimum combined balance requirement. For example, Shawn’’s checking account has a $1000 minimum combined balance requirement. This requirement can be met by the balances of both his checking account and his savings account. He has $500 in his checking account and $2000 in his savings account. Even if he spends all of the $500 in his checking account today, he won’t be charged the service fee. Why? The combined balances of his checking and savings accounts will be $2000, still greater than the $1000 requirement.
You keep a large amount of money in an account that contributes to the combined balance.
You don’t want to open another account or aren’t sure if you’ll meet the combined balance requirement with your checking account alone.
Average Monthly Balance
At the end of each business day, your account balance is recorded. When the statement-cycle ends, these balances will be added up and divided by the number of days in the statement cycle. (That is to say, they’ll be “averaged.”) If that number is higher than the “average monthly balance” requirement, the bank or credit union will not charge you a service fee. For example, Josephine has a checking account with a $500 average daily balance and each statement cycle is 30 days. She keeps a checking account balance of $501 for the first 29 days, but on the last day of the statement cycle, she spends all of the $501 and ends the day with a $0 balance. Will she meet the balance requirement, or will she be charged the service fee? Unfortunately for Josephine, the bank will charge her the service fee. She just barely met the service fee for the first 29 days and then dropped way below it on the last day. Consequentially, her average balance is $484 — lower than required $500.
[($501 * 29 days) + ($0 * 1 day) / 30 days)] = $484.3 average balance
You tend to keep the same amount of money in your checking account each day and that amount is higher than the required average monthly balance.
Your balance is often less than the required amount with your checking account alone.
Can I meet this balance requirement?
Accounts with balance requirements generally offer better features than accounts without balance requirements (“free” checking accounts). Although you may want these extra features, you might be better off opening the account with no balance requirement. It all depends on how you use the account. Depending on which account you like, you should be able to feel comfortable with your answers to these questions:
Will I keep enough money in the account(s) to avoid the service charge?
Even if a checking account offers attractive interest rates, you’ll always lose if you end up paying the balance requirement. This goes the same for savings accounts.
Will I actually use the features this account offers me?
If you like an account and a bank or credit union, but don’t know if you can keep the required balance, look at the free accounts offered by the same financial institution. You might find that the two accounts are hardly different.
We at FindABetterBank believe you should think about the features you want first before even looking at the checking accounts offered. By keeping a critical distance from the checking accounts a specific bank or credit union offers, you can determine what it is that you want before the financial institution tells you. Then pick the account from the institution you want. At the end of the day, everyone is better off — you’ll get the account that really fits you, and the bank or credit union will have a happy customer!