The Best Checking Accounts of 2010

photo:  DucDigital 

Earlier this month I got a letter from Chase. Even though it was a plump envelope like a college acceptance, I knew it contained the news I’d been dreading ever since Chase took over Washington Mutual in 2008: my free checking account would no longer be free.

This is my daily spending account. It doesn’t receive a large direct deposit or run a high average balance, either of which would have been enough for Chase to waive the fee. So I went shopping for a new bank. Here are some options I considered, and what I ended up choosing.

My bias is for plain vanilla checking. I’d rather use a product with no fees, minimums, or requirements than one that pays more interest but makes me jump through hoops or hits me with unexpected charges. I’m looking for a hammer, not a Leatherman. (I don’t care about having a local branch.) That said, I did consider a couple of Swiss Army-style accounts, which I’ll describe below.

This year has been tough for bank revenues: changes to overdraft coverage, the CARDAct, and the upcoming regulation of debit card interchange fees are all hitting banks in the bottom line. That makes free checking harder to find, and any of the products I discuss could change their terms at any time. For now, however, these are some of the best.

Ally Bank

Ally has no minimum opening or ongoing balance, pays 0.5% interest, reimburses all ATM fees (but charges a currency exchange fee for foreign transactions), and charges $9 maximum per day for overdraft coverage. You get free paper checks, too.

Schwab Bank High Yield Investor Checking

The yield isn’t really so high (0.25%), and you have to open a brokerage account, but there’s no minimum balance for either the brokerage or the checking account. If you keep some money in the brokerage, however, it can be used to cover overdrafts at no charge. Free checks, unlimited free ATM withdrawals (and, uniquely, no currency exchange fee), and basically no fees for any normal thing you want to do.

My local credit union

The checking account at my credit union is pretty typical of credit union offerings: it pays a little bit of interest (0.25%), offers a line of credit or savings account transfer for overdraft coverage, gives you free paper checks, and charges to use out-of-network ATMs.

PerkStreet Bank

Now we’re veering into the fancy stuff. PerkStreet pays no interest, but its debit card offers reward points that can be used for iTunes, Amazon, and other retailers, or converted into a Visa prepaid debit card. It has a large ATM network, but you’re on the hook for out-of-network ATM fees. Since PerkStreet’s perks are funded by debit card interchange fees, it’s hard to see how they can remain so generous when those fees are cut in 2011.

Reward checking accounts

This is the generic name for a product offered by many small banks and credit unions. It offers high interest (3% and up) on a balance of up to $10,000 (up to $25,000 at some banks) if you jump through some flaming hoops. Typical requirements: at least 10 debit transactions per month; e-statements; direct deposit; use of online bill pay. This product is also endangered by the new debit regulations. To compare accounts, visit DepositAccounts.com or CheckingFinder.com.

I spoke to Bankrate’s Greg McBride about reward checking earlier this year, and he cautioned: “If you’re going to have to keep a running tally of how many debit card transactions you’ve done so you can make sure you clear that threshold every month, this probably isn’t going to work for you.” Adapting your lifestyle to the demands of your checking account is a hard way to live.

Incredible Bank

This bank’s website features a bodybuilding theme; I’m not sure whether this is reassuring. It pays 1.35% interest on any balance, low or high, but has a $1,000 minimum opening deposit. You have to take paperless statements, and you can’t write paper checks on this account at all, but the bank’s online bill pay can be used to send a check to anyone. Oh, and they’ll charge you $5 if you lose your debit card.

In the end, I went with Schwab. The product has been around for years, boringly offering a little interest and no fees for anything short of outright misbehavior. I like my banking boring. I also like to travel to Canada, and not paying that annoying foreign currency fee will warm my heart while I’m in the frozen north.

Now my only problem is that twinge of fear every time I get a fat envelope in the mail.