Switching Bank Accounts

I ran across an article this morning talking about the cost of closing a bank account (http://finance.yahoo.com/news/closing-bank-account-cost-group-190929864.html).  The Consumers Union group has discovered that some people may face fees of $55 or more ... and the fees can be even worse if the bank re-opens the account after the closure.  It can be frustrating when you find yourself in a situation like that ... because it seems there is no way to win.  No matter what you do, the bank is going to take advantage of you.

But it doesn't have to be this way.  A little over a year ago, I switched financial institutions.  I wasn't with one of the mega-banks ... but I was a customer of a larger bank in this area.  I switched to a smaller credit union, because I was increasingly disgruntled by some of the bank's policies.  Here are the steps that I followed.

First, I saved some money for a couple of months -- knowing that I'd have accounts at two institutions simultaneously during the switch.  While I was doing this, I was shopping around for an institution that offered good services, competitive rates, accessibility, and so forth.  A local credit union proved to be the best option for me.

Second, I made sure that my bank statement was reconciled.  (I balance my checkbook each month, so this wasn't difficult for me.)  Along with that, I made a list of all of the sources for automatic deposits (the direct deposit from my employer) and charges (drafts for insurance payments).  This is vital information before a no-expense switch can be made.

Armed with this information, I was ready for step three:  I opened my new account.  I knew that it could be a week -- or even two -- before I received checks for the new account.  The account I opened at the credit union pays interest and incurs no fees as long as the account maintains a $500 minimum balance -- so my initial deposit was $500.  The rest of my money stayed at the bank.

Fourth, as soon as the new account was opened (so that I had the credit union's routing number and my account number), I sent notifications to the sources of my direct deposits (my employer) and drafts (the insurance companies).  It can take 3-6 weeks to ensure that these have all been switched over correctly, so I needed to start that process as quickly as possible.

(As a note, these are the types of things that, according to the article, can cause a closed bank account to re-open.  If a direct deposit is received, they can re-open the account.  They can also re-open an account -- and impose overdraft penalties -- if a draft arrives.  So it is very important to be sure that all automatic deposits and drafts are switched to the new account before the old account is closed.)

While I waited for checks to arrive, I continued to use my (old) bank account -- since that's where my money was. The fifth step of the process happened when the checks for the new account finally arrived.  In the old account at the bank, I left enough money to cover the minimum required (to avoid fees), plus enough to cover all of the outstanding checks and drafts that might not have been switched over.  Everything else was transferred to the credit union, and that became the account I was using.  Once this happened, I wrote no more checks on the old bank account.

By way of example, suppose that I had $350 in outstanding checks at the bank when I started actively using the credit union account.  Suppose I had another $100 in monthly drafts -- I had notified the companies to switch banks, but I was not sure they had yet done so.  Therefore, I kept $1,450 in the bank account -- $350 to cover the outstanding checks, $100 to cover the drafts, and $1,000 to maintain the minimum balance that would avoid fees.  Everything else was moved to the credit union, and that became my active account.

The final step of the process occurred when all of the outstanding checks had cleared, and when I was certain that all of the automatic drafts and deposits were being routed to the new account.  At that point, I closed the bank account and took the last of my money to the credit union.  For me, the entire process took about two months -- from the time I opened the new account until the time I closed the old one.  But, by being patient, I paid no fees at either institution.

This does require that you have enough money to divide between the two institutions.  Given that flexibility, it just takes a little bit of patience in making the change.  When you are impatient and try to make a quick change, the fees will start to add up quickly.