Choosing a banking institution seems like a simple enough task. Many people have banked with the same institution since their first job (or the same lineage of institutions after various acquisitions). However, just because something is familiar doesn’t mean it fits your needs. This article outlines a few things to consider when choosing a bank.
Define How you Plan to use Your Bank
When understanding the big picture of personal finances, I always explain to clients that bank money is designed to be “safe” and accessible. As a result, you can’t expect your bank money to grow much if any. However, your bank can offer several other services that fit your needs. For instance, international transfers or lines of credit, to name a couple. Fundamentally, banking institutions are not great for investing for long-term growth, but understanding what services your bank offers that you might take advantage of (and if they do those things well) has an impact when choosing where to keep your money.
Most banks have some level of insurance against your banking institution going completely under. However, you still want to ensure that the institution you are trusting your money with is financially responsible. There are a handful of institutions that, even though they are big corporations and household names, have a history of bad financial decisions. On the other hand, it’s also worth noting that there are a number of local banks or credit unions that might not be giant corporations but are financially very strong.
This circles back to what your bank is used for and what your lifestyle is like. The credit union around the corner can be really convenient for depositing a check or stopping to pull out some cash on the way home, and most institutions offer good online banking and bill pay services. However, if you travel a lot, there probably isn’t a branch of the local credit union in another state (or another country, for that matter), so you could be paying a significant amount in fees if you don’t always bank near your hometown. A bigger bank with multiple locations could be a better fit for someone traveling, but local banks or credit unions may be stronger in other areas. On the other hand, I also work with a handful of international clients who bank with bigger institutions because it makes transferring money between countries more accessible.
The service model of your bank is important. I recently financed a vehicle, and the dealership wanted me to go through one of the institutions they work with. My plan was to refinance through my local credit union anyway, so this was just a technicality for me. However, working with the bank that the dealership used was an absolute nightmare. I receive much better service from my local credit union, who I bank with often than with the faceless bank that the dealership preferred. This is an area that local banks and credit unions typically do better with, especially if you already have a relationship with them. They are in the communities they serve, so they tend to have more of a focus on customer service.
This is on both ends of the transaction. On the receiving end, you want to be getting the best crediting rate on your money. Albeit, banks and credit unions are not growth-oriented. As mentioned above, you may find that some institutions have more attractive savings rates than others. It’s worth noting that I caution my clients to be wary of ultra-attractive, seemingly too-good-to-be-true savings rates from your bank, as those typically come with some fine print that limits your access or dilutes the actual yield. On the other hand, if you’re using your banking institution for lines of credit like a mortgage or a car loan, you want the lowest rate possible. Again this is an area that (due to their structure) credit unions tend to do better with, especially if you have an existing relationship with them.
You may find that one institution does not suit your needs 100%. In that case, there is no obligation to keep all your money in one place. Personally, I use both a local credit union and a big-name corporation for my banking. I like the better service and rates that the credit union offers, but I prefer the access that the big bank offers when I’m traveling. However, you can also end up with too many institutions. I have a number of clients that, as mentioned above, have been banking with the same institution since their first jobs. Sometimes when people get married, they don’t always consolidate their finances, and when they buy a home, they end up with a separate bank because the rate was good, and each spouse has a savings and checking in their respective banks. Then, at some point, they see an attractive high-yield savings account advertised with yet another institution. Before you know it, these folks are banking with four different institutions and have half-a-dozen different accounts. As you can imagine, that over-complicates things and can lead to unnecessary fees or prevent you from getting a more attractive yield because of breakpoints the bank might offer. What is most important is finding the balance that puts your money to work best for you.
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Written by Justin Meyer