Bank of America allows teens to open checking and savings accounts at age 16. This is a great idea, in theory, to promote a greater understanding of the financial practices of banks and money management skills that are necessary later in life. If the bank’s policy isn’t explained to the teen in detail, the lessons can be costly and frustrating. This is a lesson my son learned when he opened a checking and savings account after he got his first after-school job at age 16.
Bank of America’s Campus Edge checking account is great for teens learning to budget their money. The account has no monthly fees, and even allows a one-time reimbursement of an overdraft (non-sufficient funds or NSF) fee should they need it. Teens need to understand some of the pitfalls that can cause overdrafts to happen in the first place.
1. Monthly maintenance fees. Though tough competition has many banks offering free checking accounts, many banks still charge monthly maintenance fees. These fees can be assessed as a set monthly amount, a per check charge for each check you write over a predetermined number, or a fee that is assessed if your balance drops below a certain amount.
2. Cut-off time for deposits. Nearly all banks have a “cut-off time.” Any deposits made after this time (usually about 2 p.m.) will not be credited until the next business day. If you make a deposit at 2:30 p.m. on Friday, your money will not be available until Monday. This means if you use your debit card over the weekend, you may have one or more overdraft fees come Monday morning. To be sure, ask the teller when making the deposit if the money will be available immediately. If not, try getting some cash back from your deposit and paying cash for your purchases over the weekend.
3. Using “Pay at the Pump” at gas stations. Pay at the pump gas stations are convenient, but can be costly. Some gas stations will actually place a hold on a large chunk of the funds in your checking account for up to three days until your payment clears. This hold can be $50, $75, or more, even in you only bought $10 in gas. This means if you only have $20 in your account, you will incur overdraft fees for this and other purchases on your account. To avoid this hold, try pressing “credit” instead of “debit” when purchasing gas at the pump.
4. Even a small overdraft can spell disaster. One sneaky way that some banks siphon your money is by rearranging your purchases so that larger amounts are deducted from your checking account first. This policy can be costly for you. Let’s say you have $75 in your checking account. You use your debit card for $12 at the gas station, then you go out for a burger and spend $5, stop for a soda later for $1.50 and finally you remember that you have to pay your cell phone bill, so you stop in and pay $60. Even though you’ve overdrawn your account, the order of the purchases should cause you to incur one overdraft fee, a costly mistake. However, a bank policy of rearranging those purchases would mean that the $60 would be deducted first, then the $12, then $5, and finally the $1.50. This means that you would be hit with not one, but THREE overdraft fees!
5. Check orders, ATM withdrawal, and other fees. When you order checks, don’t forget to deduct the amount of the order from your check register. Most banks will order checks for you or you can do it online, just make sure you know how much you have to pay. Sometimes your first order of checks is free, but you usually have to order from a limited selection of styles. Be sure you are ordering the right checks so you don’t incur unexpected charges. ATM fees are costly and sometimes are double charged — once by your bank and again by the bank who owns the ATM that you used. Avoid these fees by only using your bank’s ATM machines or by getting cash back when you pay for your purchases inside a store. I’ve actually gone inside a store to buy a pack of gum or other small item so I could get cash back and avoid using an ATM.
Savings accounts can also have fees associated with them. Without careful planning and maintenance, these fees can eat up your savings before you know it.
1. Monthly maintenance fees. Some savings accounts have monthly maintenance fees if your balance drops below a certain predetermined amount. Be sure to understand this fee when you open a savings account. Many times there are other things that you can do to avoid this fee. For instance, direct deposit or an automatic monthly transfer from your checking account to your savings account can mean avoiding maintenance fees.
2. Excessive withdrawal fees. Savings accounts are not meant to be used like checking accounts. Most banks only allow three withdrawals per month without penalty. More than that and you may be charged a fee for excessive withdrawals. If you anticipate that you may need to withdraw money from savings, consider withdrawing more than you may need. You can always replace the money later with no penalty if you end up not using it. Excessive withdrawal fees are different for each bank and type of savings account, so be sure to ask about your savings account.
3. Overdraft fees. Although banks won’t allow withdrawals on savings accounts for more than the balance, excessive withdrawal fees, ATM fees, and maintenance fees can cause your account to become overdrawn. When this happens, the bank may charge your savings account an additional overdraft fee. This overdraft fee is usually not as hefty as the ones charged on checking accounts, but keep a close eye on your balance to be sure you don’t overdraw your savings account.
Handling money for the first time can be a big task for teens, but it is good experience for developing money management skills that will be necessary later in life. Parents should discuss all of these fees with their teens before opening up bank accounts in their name, and teens should talk with bank representatives in person to be sure that they understand the bank’s policies concerning fees and other charges associated with their accounts.