How to choose your first bank account
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How to choose your first bank account
As we say goodbye to summer, many parents across America will soon be saying another kind of farewell: to their teens, as high school grads begin their first year of college.
It’s an exciting time of new independence — and all the responsibilities that come with that.
With finances, especially, it is often the first time that teens are truly in charge of the numbers: opening bank accounts, applying for credit cards, setting a budget, and building up their credit.
Those are all good things, but there is plenty of potential for things going wrong, as well: 50.7% of teens ages 15-18 fail the National Financial Literacy Test, a 30-question survey from the National Financial Educators Council.
Teens may not even be aware of things like minimum balances, overdrafts, ATM fees, and all of the little charges that institutions deploy to nickel-and-dime you. It’s a lot of information to process, coming at them all at once.
Laura Lynch faced this very situation just last year. The financial planner from Abiquiu, New Mexico, had a stepson heading off to start his freshman year at college.
And that meant a quick financial crash course on all the basics he would need to know — everything from opening bank accounts, to adding him as an authorized user on credit cards, to explaining how credit scores work.
“Many of the financial processes and logistics that are part of everyday adult life are confusing at first,” says Lynch. “It’s important to help college freshmen adapt to their new level of financial responsibility.”
Current, a consumer fintech banking platform, shares a little Banking 101 to get them started.
Opening accounts
Even if the amounts are tiny to begin with, you want to put in place the basic banking infrastructure for young adults to begin their financial lives.
That typically means a couple of accounts — first a checking account for everyday use, where interest rate isn’t the primary concern. In today’s digital age, consider looking at online or mobile-only banks, which eliminate prior generations’ concerns or needs to choose a bank located near school. Many online or mobile-only banking apps don’t have mandatory monthly fees or minimum balance requirements, which can add up quickly.
Unfortunately, many others do. A sampler: Noninterest-bearing checking accounts average $5.47 in monthly service fees as of 2024, according to financial information site Bankrate, while interest-bearing versions shoot up to $15.45 a month. But others charge nothing, which is why it is so important to pick the right accounts from the start.
Second, establish a savings account where they can generate real gains with longer-term money. Currently you can find around 4% on your cash in higher-yielding options, an attractive return for such low-risk accounts, with some of the highest rates often again found with online or mobile-only accounts.
Understanding credit
College is the ideal time for students to start dipping their toes in the world of credit — carefully.
“You may consider opening a starter credit card,” says Easton Price, a financial planner in Huntington Beach, California. “Your limit will be relatively low at first, but will be very helpful in establishing and building a healthy credit score.”
Of course college campuses are easy pickings for credit-card companies. Students get bombarded with offers for new cards and get caught in a negative cycle of high debt because they haven’t yet learned how to manage spending wisely.
But if they use cards responsibly, paying off debts on time every month, that’s exactly the kind of positive history that the credit-scoring companies will recognize and reward.
A secured card is a similar way to build those scores with everyday banking transactions, and have guardrails in place to keep students from overspending, as they can only spend the amount of money they have in their accounts. You’ll want to look for one with none or a low required security deposit and that reports your on-time payments monthly to all three of the major credit bureaus to help build your score.
Watching out for fees
One momentum killer for young finances: Fees. For a teen getting their first paycheck, for instance, it can be disheartening to see their hard-won money eaten away by miscellaneous bank fees.
For instance, the average overdraft charge for bank accounts (where the institution temporarily covers the deficit) is $27.08 as of 2024, according to Bankrate. Even more worrisome, those figures are headed back up after years of decline. While you’ll want to look for an account that does not charge overdraft fees, also look to see if it offers overdraft protection, which is also common with many online and mobile-only banks, and can provide an extra cushion if needed.
Then there are charges for insufficient funds, which are tied to events like declined card charges or bounced checks. Those average $17.72 a pop, Bankrate found.
Another tripwire to avoid: Minimum balance fees. If a bank account requires a floor amount, and your savings are not yet at that level — and many teens are not — then you will get socked month after month. The smarter choice is to select accounts that don’t mandate minimum balances at all.
Finally, ATM fees are a real killer for those who go out-of-network on a regular basis. The average is up to $4.77 per transaction, the highest amount since Bankrate began tracking the numbers back in 1998.
The wise course of action: Avoid that possibility in the first place by opening accounts with institutions that have wide networks for fee-free withdrawals.
With that kind of basic financial know-how, new college students can avoid the notorious debt traps of freshman year and focus on what they’re really there for: an education.
This story was produced by Current and reviewed and distributed by Stacker.
