personal finances — October 03, 2016

4 Things to Know About Online Banking

by Susannah McQuitty

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Man sits on steps outside brick building and manages his account on mobile.

A post on online banking may seem a bit redundant nowadays – aren’t all bank accounts online, to some extent? What’s the difference between an online bank account and a “normal” bank account?

Rule of thumb: Online banks are only available through provided apps and websites, while traditional banks usually have brick-and-mortar locations and offer some online tools. Both types of banks have pros and cons, so let’s see what this online bank trend has to offer.

Interest rates are better for online savings accounts

If you’re looking to open a savings account, and only care about getting the best interest rate, online banks are the way to go. Since they save a lot of money on overhead costs by not having physical locations, their APY, or annual percentage yield, is usually more than four times the average rate. So the money you put into an online savings account is going to build your savings at a faster rate than a traditional bank savings account.

No lines, no closed signs, and low fees

Since online banks are designed specifically for computer and mobile use, their user interface is super user- and mobile-friendly. Online also means not worrying about trying to get to an actual building during bank hours and having to wait in line – or having to run back home to fetch some necessary info that you forgot. Another perk is that most online banks don’t have a minimum deposit to start a checking account, and they usually don’t have maintenance fees. You may run into some if you overdraft; otherwise, avoiding fees with online accounts is a breeze.

Big deposits might require the USPS

One downside to having no physical location is that you’ll have to deposit your checks by mail or by taking a picture with your smartphone, and if your check is bigger than $5,000, generally you won’t be able to send it via picture. That’s not great news for small business owners or freelancers who make big bucks on a single check and don’t want to risk losing it in the system. Direct deposit services work great, but they’re not always available, so traditional bank accounts generally have a leg up when it comes to making deposits.

Cash deposits are a bit of a headache

Similarly, if you get tips or are paid in cash, depositing that money can be a bit complicated. There are deposit-accepting ATMs that you could use, but if there are none near you, you’ll have to use a money order or use a reloadable prepaid debit card. Again, if you can use direct deposit or transfer from a brick-and-mortar account, cash deposits are no problem.

At the end of the day, it’s up to you

I guess I could have lead with that, huh? But it’s true. Depending on your situation, online banking accounts may be your worst nightmare or a dream come true. It’s all about knowing the differences between an online bank account and a traditional banking account. Just make sure that you do your homework on whether the online bank is legit and insured by the FDIC (or by state insurance).

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