Save and Invest

Don't assume that online checking accounts are always the best deal

Lesia Valentain | Twenty20

Online banks generally offer consumers lower fees and higher interest rates. But that doesn't mean that all online checking accounts are created equal or that they're always the best option.

You still need to do your homework.

Online banks have received a lot of attention around their savings accounts, many of which offer rates 20 times higher than the national average at traditional banks with physical branches, otherwise known as brick and mortar banks. Many experts say it's a no-brainer to use a high-yield online savings account for at least some of your savings.

But when it comes to checking accounts, there are more factors to consider, particularly around your banking habits. Online banks still offer, on average, lower rates when it comes to three big fees: monthly maintenance, out-of-network ATM fees and overdraft fees. But that's not to say you don't have to pay any fees.

"Overdraft fees, in particular, are still something to worry about," Ken Tumin of DepositAccounts.com tells CNBC Make It. Even many online banks charge overdraft or non-sufficient fund fees when you use your debit card and your account balance is $0. Instead of having your card declined, your bank may offer to cover the difference and charge you an overdraft fee. Others will transfer the money needed from a linked savings account, but that service may also incur a fee.

Read the fine print

It helps to comparison shop different accounts so you understand exactly what types of fees you can avoid and how interest rates may vary. CIT Bank is rolling out a new eChecking account on Friday that does not charge a monthly maintenance fee, reimburses up to $15 in out-of-network ATM fees each month and offers some interest, up to 0.25%.

Yet the account is not completely free of fees. The bank charges 1% for foreign ATM transactions and a $30 non-sufficient funds fee, though CIT will let you transfer money without charge from a linked CIT savings or money market account to cover any shortfalls. CIT is also requiring a minimum of $100 to open an account and does not offer paper checks, which can be a problem if you still pay for monthly expenses, such as rent, by check.

It's a solid offering, but you may find online competitors such as Discover Bank and Axos are a better fit. Both banks do not charge any overdraft fees, in addition to skipping monthly maintenance fees. Plus, Axos Rewards Checking offers up to 1.25% interest and Discover's checking account provides 1% cash back on up to $3,000 in debit card purchases a month. Axos offers unlimited domestic ATM reimbursements; Discover does not charge ATM fees, but if you use one outside its network of 60,000 machines, you may be charged by the operator.

However, the vast majority of online checking accounts suffer from a simple, inescapable conundrum: It's harder to make deposits, especially in cash. Many times, online banks only accept money in the form of mobile check deposits through their app, wire transfers, transfers from another bank account or by mail.

That may be a major hurdle if a large part of your income is cash-based, such as if you work as a restaurant server, an electrician, a massage therapist, a mechanic, a makeup artist or a plumber.

There are brick and mortar options

If an online bank account presents challenges for your lifestyle, there are some banks that offer similarly competitive rates and also limit their fees.

Utah-based TAB Bank offers a Free Kasasa Cash Checking account that has no minimum to open, doesn't charge overdraft expenses or monthly maintenance fees and reimburses up to $15 a month in ATM fees. TAB's account also offers 4% APY on balances up to $50,000 if you set up direct deposit and make 15 debit card purchases of $5 or more each month. Because of the high interest rate, this is considered a rewards checking account.

Kasasa is a Texas-based company that has partnered with credit unions and over 3,500 community banks like TAB to provide the infrastructure for these rewards checking accounts. DepositAccounts has a search tool to find a bank offering a Kasasa account near you.

Capital One's 360 Checking account is another good option, and the bank has over 700 locations. There's no monthly maintenance fee or minimum balance requirements and the account pays 0.20% on balances up to $50,000 (higher balances earn more). Plus, Capital One has 39,000 fee-free ATMs. If you do need to use one outside that network, Capital One won't charge you a fee, but the ATM owner may.

You can also avoid overdraft fees at Capital One. You can opt to auto-decline any transaction that will overdraft your account or choose "Next Day Grace," where Capital One will pay the transaction and you'll have one business day to get the funds into your account. Capital One also allows you to transfer funds for free from linked savings or money market accounts and gives the option for an overdraft line of credit where you pay 12.75% interest on the amount you overspend.

No matter where you bank, understand your money management habits. It's usually more worthwhile to focus on finding an account that avoids fees, even if you need to sacrifice on the interest rate. That's because a single overdraft fee or even a few out-of-network ATM charges generally will cost you more than you'll make in interest.

Don't miss: 70% of Americans make this simple banking mistake—and it could cost them $50 billion

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