Where Checking Is Still Free

Following the path of the pneumatic tube and the passbook savings account, the cheap checking account is on its way to banking history. In its place, customers are finding the more-expensive checking account, with charges and fees at every turn. But even as costs rise – and checks become increasingly obsolete – there are still some cheap ways to bank by check.

Free checking accounts were a big sell over the last decade, as WaMu -- remember them? -- pushed other banks to drop their monthly fees and minimum balance requirements. But WaMu is gone, and less than half of all checking accounts are now free, according to MoneyRates.com. In July, Wells Fargo added fees to its formerly free checking account; this month, Chase also doubled some of its monthly fees. Now the total bill for a year's worth of checking could run up to $144. TD Bank, which earned customer loyalty for its no-ATM fee policy, has reversed itself. Starting in March, many customers will start paying $2 to withdraw cash from non-TD ATMs, "For many banks, there's no compelling reason why they should give free checking accounts anymore," says Brian Riley, senior research director for bank cards at TowerGroup, a financial research company.

A Chase spokesman says customers get value from the accounts and points out there are ways to avoid its fees, including making at least one $500 direct deposit, maintaining a $1,500 checking account balance, or incurring other fees. Overall, banks say the fees are the natural consequences of new government regulations that have squeezed revenues. In particular, they're talking about limits on overdraft fees, which went into effect in August, and the Durbin amendment to the financial reform bill, which limits how much banks can earn when shoppers use a debit card. Spokespeople for Chase, TD Bank and Wells Fargo, which replaced its free checking with a $5 monthly fee, say that regulatory changes are partly why they're increasing fees.

That means banks will try to put customers on the hook for the difference, says Riley. But there are still plenty of ways to get free checking. Credit unions and small community banks still typically offer the perk, and some banks offer free checking for specific age groups, like students (and their 50-plus parents). If you're interested in a bigger bank, or between the ages of 22 and 50, here are four cheaper alternatives to traditional checking accounts.

Online banks
Pro: Still free
Con: Limited access

Experts don't think online banks will be able to offer free checking forever, but for now, many still do. They also don't require minimum balances or charge monthly maintenance or ATM fees, and they throw in additional incentives that aren't typically offered at brick-and-mortar banks. Ally Bank, for example, features an annual percentage yield of up to 1.05%, which is higher than the average rate of 0.71% on interest-bearing checking accounts, according to Bankrate.com; ING Direct offers a $50 bonus to customers who open a checking account. But for people used to a branch on every corner, online-only accounts can be frustrating, because you typically have to deposit checks via the mail, or link to a brick-and-mortar account – which may defeat the purpose.

Brokerage firms
Pro: All-in-one service.
Con: Chipping away at investments.

Recently several brokerage firms have started to offer deposit accounts – as long as customers open an investment account as well. Charles Schwab and Fidelity are the most well-known: Both offer interest-bearing checking accounts, with no minimum balances and no ATM fees (they'll even reimburse any fees charged by the ATM itself). They also allow customers to use their brokerage offices for problems with their accounts and to deposit checks. The companies, of course, want to turn checking customers into investing clients, which is why they require customers to open a brokerage account. At Fidelity, the minimum investment is $2,500. At Schwab, there's no minimum. But there's the rub: If customers overdraw their checking account, the brokerage may take the amount of the overdraft from cash or money market mutual funds in the brokerage account. If the brokerage account is fully invested in stocks and bonds, the transaction won't go through.

Savings and money market accounts
Pro: Fewer fees, higher interest.
Con: Few transactions permitted.

Besides paper checks and a debit card, the biggest practical difference between a savings account or a money market account and a checking account is the amount of transactions you can make each month. On a savings account, Federal Reserve rules permit only six transfers or withdrawals per month, while checking accounts are far more flexible. In exchange for limited transactions, customers get higher interest rates: average money market account rates are up to 0.89%, according to Bankrate.com, but can run higher like up to 1.3% at American Express and 1.24% at Capital One. But break the six-transaction rule, and the bank can charge you, or change your account to a checking account. Even so, a savings account could work for someone who is comfortable with a credit card and pays off the balance each month (as opposed to a debit card), pays only a couple monthly bills, and uses little cash, says Richard Barrington, a banking analyst at MoneyRates.com. And fees, if they exist, are limited mostly to those who draw down on the account.

Prepaid cards
Pro: Lower fees than a checking account …
Cons: … except when they're higher.

When paired with a savings account, a debit card can do almost anything a checking account can. Consumers can use it to store cash, pay bills online, and swipe for purchases. Of course, the savings are variable. On the lower end, the Capital One MasterCard doesn't charge a monthly fee for customers who load at least $500 each month (otherwise it's $4.95) and the Green Dot Gold Visa, which charges $5.95 a month. (These cards also don't charge the activation or transaction fees for purchases that are typical of most prepaid cards.) But more prepaid cards with lower fees are likely on the way, says Odysseas Papadimitriou, CEO of Cardhub.com, a credit and prepaid card comparison web site – they weren't affected by the recent government legislation, so they're more profitable for the banks.