Bank Fees 101
It’s undeniable that banks perform a tremendous service in the modern world. Without them, very few individuals would be able to gain any meaningful level of personal wealth and ensure it remains protected. Furthermore, only a small number of businesses would be able to access the capital they need to cover their start-up costs or the cost of expansion without them, and ultimately, the global economy we all partake in today would not be possible. They are some of the most powerful and important institutions in the world, and your relationship with your bank is one of the foundational elements of the way you manage your money.
However, if you’re making an effort to improve your financial habits and reduce spending, there may be something you’re forgetting to reassess; that is, your bank/s and the nature of your accounts with them. To survive, banks need to profit off their account holders. They do so primarily by selling you financial products and services (such as credit cards, loans or financial advice from an expert) and by collecting fees from those who engage in behaviour that either violate bank terms or fall outside what’s considered to be “standard services” for the holder’s account type. Many people don’t recognize it as a drain on their resources, as money collected by your bank never really “leaves” your bank account in the same way that it does when you purchase other goods and services. However, if you’re not mindful of your relationship with your bank, you may be being gouged on a regular basis!
If you find that you’re constantly being charged fees by your bank and you’re ready to make some changes, that leaves you with a few options. The first is to contact your bank and see if there’s another account type they offer that could better meet your needs. For example, if you’re often getting charged fees for moving money in and out of a savings account, you may need a secondary chequing account to use for your day-to-say spending. That way, you can keep your savings growing untouched in one account and you can move your money freely through a chequing account designed to accommodate that. If your bank offers numerous different kinds of accounts and you’re not totally sure what the difference is between them, book an appointment at your bank to have someone explain them to you in detail. Opening a new bank account is not a decision that will change your life forever, but it is important and deserves your full attention and understanding. Make sure you’re well aware of both the benefits associated with each account type and all the fees you may be on the hook for if you decide to go ahead.
Your second option would be to close your bank account and move to a new bank entirely. One of the interesting things about the banking industry is that historically, there was generally a strong sense of loyalty between many people and their banks. They banked where their parents banked, opened accounts for their children there and didn’t question that bond, even when it wasn’t always beneficial to them. This relationship between Canadians and their banks has changed over time due to a number of reasons, including the increasing number of banks available in Canada, the proliferation of competing customer loyalty programs and the general mistrust for the banking industry created by the 2008 financial crisis. However, even today, people often stick with their banks even when they feel they aren’t 100% happy with the service they receive. One of the major reasons behind this is the cost, both monetary and in terms of time and effort, of switching your primary bank. This includes redirecting bill payments, paying account closure fees, cancelling and opening new credit cards, the process of transferring funds, getting to know a whole new online banking interface and so on. These costs are generally seen as “one of the great stabilizers of the banking industry”; if you’ve ever seen ads from banks offering you cash bonuses to open an account with them, that’s a direct result of this fact! So, if you’re upset that your bank has been charging you, it may seem like the most satisfying decision to close your accounts abruptly and leave. However, it may cost greatly you in time, money and effort to do so, so be warned before jumping at this option.
Your final option is to make changes to the way you’re managing your money. While some bank fees are unavoidable (ex. a monthly fee), many bank fees are incurred when people are careless about their bank balance and the way they use their bank cards (both debit and credit) and other bank services like ATMs. In that light, we wanted to cover a few of the most common bank fees and offer some advice on how you can work to avoid incurring them in the future. Welcome to Bank Fees 101!
Monthly Fee
This one is a fair charge to maintain an account with any premium level of services. The average monthly fee for a bank account in Canada is $10-$15, so if you are paying more than that, there are plenty of banks out there who can offer you a discount. Beyond that, it’s important to keep this in mind as you budget and create a plan for your spending. If you find you always forget about when your monthly fee is going to be charged, it helps to write down the date in your agenda each month so you see it coming a mile away.
There are plenty of low-fee bank accounts available from Canada’s major banks. These accounts are minimal in extras offered (ex. only a few free debit transactions per month), but might still offer you the basic features you need from your bank if you’re on a budget. The Government of Canada has compiled a list of these accounts here. It should also be mentioned that there are plenty of free online savings accounts that you can open and use for no charge; however, these accounts often don’t come with standard features like a debit card. These types of accounts make great secondary savings accounts, but aren’t always the best option as your primary choice.
In a similar fashion, most credit cards will charge you an annual fee for use. The amount of this fee will be heavily dependant on the type of credit card you have, but usually starts at around $40. If you find that you completely forget about this fee until it shows up on your statement each year, keep in mind what month this fee is charged and do your best to write yourself a note for next year. That way, you’ll be able to work it into your budget for that month.
Non-Sufficient Funds (NSF) Fee
In the event you over-commit yourself to creditors and don’t have enough money in your bank account to cover a purchase, you will likely receive an non-sufficient funds (NSF) fee from your bank. These fees can be significant (usually between $45-$48 in Canada), so they can be a lot to take on if you’re in a position where your balance was already close to zero. The creditor/s who tried to withdraw from your account is also usually charged when the transaction fails (often around $25). If a business or utility provider is charged on your behalf, they may pass this fee along to you; you may have already agreed to this in the fine print of any agreement you’ve already signed with them. That could leave you with a huge fee of close to $70, in addition to any late fees you may incur from your transaction failing.
Remember that if you incur an NSF fee, it never hurts to ask your bank if they’ll reverse it for you. If you’ve had numerous in the past, they may not be so wiling to help you out, but if it’s unusual for you or there were unusual circumstances that caused it, they may be willing to hear you out. The worst that can happen is that they say no, so don’t be afraid to raise it with them if you feel you have a legitimate claim! If you have incurred a few NSF’s, your bank may not be as willing to budge on reversing it for you. In this case, you’ll need to get into the habit of checking your bank balance every day and watching for major transactions (ex. bill payments) as they leave your account. If you’re not used to doing this, write “check bank balance” on your agenda or calendar each day as a task to complete. It’s also important to remember that many businesses and creditors rely on bank transfers, which often take a business day or two to complete (which is easy to forget if you use lightning-fast Interac e-transfers for personal use). If you find you make a number of transactions like this on a regular basis, it’s worth writing down the scheduled dates of these transfers in your agenda as well. Money won’t always leave your account on the exact day you assume it will, which can get you into trouble if you’re not checking your account each day.
Overdraft Protection
When you make a mistake with your bank balance (it happens to the best of us), it can be great to have overdraft protection to guard yourself from incurring NSF fees. However, paying for overdraft protection doesn’t necessarily mean you’ll be saving tons of money. Depending on how frequently you’re relying on your overdraft protection, you may even be doing yourself more harm than you would without it! If you don’t have enough money in your bank account to cover all the transactions you’ve committed yourself to but you have overdraft protection, your bank will cover the cost of the transaction/s with your creditor/s; in this case, your transactions will succeed (unlike with NSF’s), but your account will go into a negative balance. Most Canadian banks will charge you $5 for every transaction that causes your bank balance to hit negative numbers. That means, for every transaction that occurs while your bank account is overdrawn, you’ll be charged a $5 fee (even if you made a purchase that was worth less than $5, like a pack of gum). Some will also require an additional monthly fee for overdraft on top of that. If you’re not careful about checking your statements every day and fail to catch your mistake when it happens, a couple days worth of daily spending may end up being more expensive than one NSF charge. Furthermore, as your bank will pay your creditors on your behalf, you’ll also be required to pay interest on all the money you borrowed from them to make up the difference. This interest rate is high, much like that of a credit card (usually around 20% or higher) and the clock to repay your bank starts ticking the moment you make your first overdrawn transaction.
As such, overdraft protection can end up being extremely expensive; it’s great protection in the event of a once-and-a-while mistake, but if you have to rely upon it regularly, the costs can add pretty quickly. To avoid falling into a cycle of high-interest debt with overdraft protection, it’s smart to leave yourself a buffer in your bank account. This money should always remain in your bank account, but you should ultimately do your best to avoid thinking about it as spending money. For example, if you aim to have a $50 buffer in your account, you should essentially equate a $50 balance with a balance of $0; that money should not be earmarked for spending, and should only ever be depleted in the case of an emergency or in the case of a mistake that might otherwise cost you an overdraft fee. Of course, the best way to avoid incurring any overdraft fees is to be mindful of your bank balance. By checking your account once a day, you’ll have a daily reminder of what you can afford, and will be well-informed to make choices about your spending.
ATM Fee
Every time you use an ATM to withdraw cash from outside your bank’s network, you’ll be charged a fee. These fees range in cost depending on the ATM you use, but are generally between $3 and $5 per withdrawal. You also may be charged two separate fees; one from your bank, and one from the bank whose ATM you used. Though this is one of the smaller fees in terms of dollar amount, they can be just as dangerous as the large ones because of how quickly they add up if you’re not careful. Like all budgeting tactics, the best way to avoid incurring ATM fees is to take some time and plan ahead. If there’s something you must pay cash for coming up, be sure to take some out in advance from your bank directly, or keep some cash around the house so you’ve always got some on hand in a pinch.
Foreign Transaction Fee
This occurs when you’re shopping with a foreign merchant and you’ve made a purchase that must be processed through an international bank. For many Canadians, this most often occurs when they shop with American merchants online or while visiting the States on holiday. The difference in currency rates is calculated from the time of your purchase using international conversion standards, but your bank also charges you for their conversion service on top of that amount. This extra charge is usually around 3% of the transaction you’ve made. The tricky part here is that you may not realize your bank has charged you, as they include it in the currency conversion. For example, if you were to buy something online from an American merchant at a conversion rate of $1.33 CAD to $1 USD, your bank would probably charge you a conversion rate of $1.36 CAD to $1 USD without explicitly mentioning the extra 3% charge (though it would be clearly stated in any contract you would have signed with them).
If you’re trying to purchase something that’s only sold online by a foreign merchant, there’s not much you can do to avoid this kind of fee; you either accept it as part of the total cost, or you skip it altogether. However, the next time you plan an international trip, do your best to take out the foreign currency you need in advance and use it over your credit card where possible. As you still may be charged a conversion fee on taking out cash, it’s admittedly tough to avoid paying this type of fee all-in-all. But, if you’re using cash all the time on your trip, you won’t get charged that 3% fee for every transaction as you would be if you paid with your credit or debit card.
EFT Fee
Though most people get a fair number of EFT’s (electronic fund transfer) for free per month with their bank account, there are still bank accounts out there that will charge for every single EFT the account holder makes. These fees are often small, between $1 and $3 per transaction, but still significant when you consider the frequency at which most people make EFT’s. In the time before online banking and money management, EFT’s would have been few and far between, but in today’s world, you can’t manage your finances effectively without relying upon EFT’s on a semi-regular basis. If you’re being charged for every EFT, in this case, it may be time to look at a new type of bank account, or a new bank altogether!
Though not exactly the same as an EFT fee, you may also be charged for every Interac e-transfer you make. This fee is usually quite small, only about $1 per transaction, but still important to keep in mind when considering the big picture. The speed of Interac e-transfers makes them ideal for casual transfers between friends, family and small businesses, but that convenience may come with a price tag. If you find you make e-transfers on a regular basis, see if your bank offers an account that won’t charge for e-transfers, or if they have an account type that offers a high number of them for free each month.
Cash Advance Fee
Finally, one that should be avoided at all costs, the cash advance fee. If you have a credit card, you have the ability to put your credit card into any ATM and withdraw cash as you would with your debit card up to your credit limit on that card. However, it should be forewarned this cash comes with a massive price tag attached. First, you’ll be charged a fee for the cash advance transaction (usually around $3 and $5 depending on your bank). If you do so on an ATM that’s not from within your bank’s network, you’ll be charged another fee on top of that, as mentioned above. Then, all the money you take out on your credit card will be accompanied by a massive interest rate that’s higher than the interest rate on all other purchases made with that card (usually upwards of 23%). The clock starts ticking the minute you take it out; even at a rate of just 20%, if you take out $80 as a cash advance, you’ll need to pay back close to $100 to cover just that withdrawal before your next credit card payment is due. Many banks will allow one statement as a grace period to catch up on payments, but if two credit card statements pass where the minimum balance isn’t paid, your bank will then increase both your standard interest rate and the interest rate on all the cash borrowed on your credit card (usually bringing the cash advance interest rate close to 30%). In this way, the fees on cash advances can snowball out of control rapidly and sink you into a cycle of high-interest debt.
If you’re in a tough spot financially, taking out a cash advance may seem like a good idea to cover the gap until your next payday. In reality, cash advances should only ever be used if you’ve got an absolute emergency and you don’t have any other options. Much like payday loans, you’ll be charged a major premium to access that cash, and unless you’re able to pay off that balance plus all the interest incurred ASAP (which you likely aren’t if you’re relying on that cash to fill a gap), it’s a financial decision that will follow you for some time. If you can borrow money from a friend or a family member to tide you over (of course, only if you’re sure you can repay them as soon as you get your next paycheck), it will save you a ton of stress overall.
Ultimately, this list of bank fees just scratches the surface! There are a hundred-and-one ways that banks collect fees from their account holders. While it doesn’t always seem fair, the best way to avoid paying these fees is to be conscious of the way you use your money and to be on top of your bank records. You don’t need a million dollars to do it; all you need to do is take a mindful step forward in improving the way you use your bank’s services.
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