Picking a bank is like selecting a new paint color for your kitchen. You're going to see a lot of it, and while you can always change your mind if you don't like the one you've chosen, it's a hassle. Selecting the one best suited to you depends on what you need from your financial institution, and that can be complicated, especially because there are so many options.
While all banks are financial institutions, not all financial institutions are banks: They can be credit unions, mortgage lenders or brokerages, among other organizations. For guidance on how to navigate our choices, I consulted a few experts. Here's their advice:
1. Identify Your Banking Needs. "Hammer out a list of things that are important to you," suggests Jesse Ryan, managing director at Accounting Principals. "Is a checking account important? A savings account? Are you looking for investment opportunities? A mortgage? Loan consolidation? Direct deposit? Insurance?"
David Barr, a Federal Deposit Insurance Corporation spokesman, adds: "If you're a small business owner and going to be taking a lot of loans out, you might be more interested in what the bank has to offer on the lending side as opposed to deposit services."
2. Consider Convenience. Some financial institutions have branches, while others only exist online. Some have loads of ATMs, others have very few. So you need to think about how you bank.
"Large banks tend to have an advantage here," says Suzanne Martindale, a staff attorney at the nonprofit Consumers Union, best known as the publisher of Consumer Reports. "But advances in technology have made it possible and more cost-effective for smaller banks and credit unions to offer robust services as well, including online banking and decent ATM network coverage."
"If you feel comfortable enough going electronic, you can probably get some benefits there," says Ryan. "The company itself isn't paying for a bricks-and-mortar location -- no rent to pay, no staffing fees -- so they may not charge you for other services, or maybe can offer a better rate."
3. Review the Fees. According to Martindale, different financial institutions employ different fee structures. "Although large banks do typically provide ways to waive monthly fees, you are more likely to find free checking options at smaller banks and credit unions," she says. "As large banks look to recoup the billions of dollars in lost revenue from overdraft fees [and other fees], they may increase account fees for their basic checking accounts. Smaller banks and credit unions, by contrast, did not rely on those fees to the same extent for their revenue."
About those overdraft fees: Some financial institutions charge them to process a transaction when a customer spends more than they have in their account. While banks are no longer allowed to automatically charge them -- consumers must "opt in" for the service -- it's still important to be aware of what your bank charges for overdrafts, and to think carefully about the pros and cons of using the service.
4. Shop Around. "It's best to avoid making a categorical assumption about a particular type of institution," advises Martindale. "Rather, consumers should take the time to find an institution that best meets their individual needs. A combination of online research and a quick trip to a few banks and credit union branches to ask questions should do the trick."
5. Make Sure the Institution is FDIC-Insured. The FDIC is an independent agency created by Congress to "maintain stability and confidence in the nation's financial system" by regulating financial institutions. Specifically, it monitors and supervises them to make sure they are healthy and adhering to the law. It also insures our deposits so that we will can get our money back if the financial institution gets into trouble.
"Since we began insuring banks in 1934, not a single customer has lost a penny of insured deposits due to the failure of a bank," notes FDIC spokesman Barr. "From a safety standard, there's not a safer place in terms of where to place your money. If the bank fails, FDIC is there and we find another bank to take it over for us and from the standpoint of the deposit, it is business as usual for the customer."
In light of the many bank failures in recent years, it's worth reviewing exactly what that FDIC guarantee covers. (Between 2000 and 2004, only 24 U.S. banks closed. Since February 2007, more than 325 banks have failed.)
FDIC insurance guarantees deposits up to $250,000. However, not all accounts are insurable. For example, the agency guarantees checking accounts, saving accounts, and certificates of deposit, but not stocks, bonds or mutual funds. Additionally, not all financial institutions are insured. There are over 5,500 FDIC-insured institutions, and most are easily identifiable, as they have signs in their branches indicating as much. To be on the safe side, you can use the agency's "Bank Find" to locate an FDIC-insured institution near you.
To learn more about how best to use your checking account, click here. If you want to switch where you bank, here are tips on how to do so safely.