Learn more about minimum balance requirement and how it works, so you know how to make the best financial decision for you!
When it comes to banking, understanding what the fees associated with bank accounts mean and figuring out which account is the best for you can be hard. With that in mind, you might have heard of minimum balance requirement, but do you know what it is and how it impact you?
Well, that’s what we are going to talk about! Find out what it means and much more, so you can know what is the best choice for you. Also, if you want to check out more financial tips on our website, you can click on this link!
What is a Minimum Balance Requirement?
It is a set amount of money a bank or credit union requires you to maintain in your account to avoid incurring fees or losing certain benefits. It is common to see it being applied to checking and savings accounts, but it can also be seen in some investment accounts, like money market accounts.
Think of it as a threshold – as long as your account balance stays above it, you’re good to go. However, dipping below the minimum can trigger consequences like monthly maintenance fees, which can eat away at your hard-earned savings.
What Types of Accounts Have Minimum Balance Requirements?
- Checking Accounts: many traditional ones have minimum balance requirements, ranging from $25 to $500 or more, depending on the bank and the type of account;
- Savings Accounts: while common in traditional savings accounts, some banks offer high-yield savings accounts with no minimum balance requirements. However, these accounts might have limitations on monthly withdrawals;
- Money Market Accounts: these interest-bearing accounts often have higher minimum balance requirements compared to regular savings accounts;
- Certificates of Deposit (CDs): CDs typically don’t have minimum balance requirements, once they lock your money in for a specific term. However, they usually have minimun opening deeposit requirements.
How Is It Calculated?
It simply refers to the specific amount of money you need to maintain in your account on average over a certain period, usually a month. Banks track your account balance at the end of each business day, known as your daily closing balance. Throughout the month, your daily closing balance will fluctuate as you make deposits and withdrawals. To determine if you’ve met the minimum balance requirement, the average is calculated as sum of the daily closing balances for a period divided by the number of days in that period.
For example, let’s say your checking account has a minimum balance requirement of $300. Here’s how it might work:
- Week 1: your daily closing balances average out to $250.
- Week 2: you receive your paycheck and your daily closing balances average out to $500.
- Week 3 & 4: you make some purchases, and your daily closing balances average out to $350.
- Total Daily Closing Balances: ($250 x 7 days) + ($500 x 7 days) + ($350 x 14 days) = $10,150
- Number of Days in the Month: 31 days
- Monthly Average Balance: $10,150 / 31 days = approximately $327
In this scenario, even though your balance might have dipped below $300 on some days, the average for the entire month is still above the minimum requirement of $300. Therefore, you wouldn’t incur any fees.
What Happens if You Go Below the Minimum?
- Monthly Maintenance Fees: this is the most common consequence. The fee amount can vary depending on the bank, but it typically ranges from $5 to $12 per month;;
- Loss of Interest: some banks might waive interest earned on your savings account for the month you fall below the minimum;
- Account Closure: in extreme cases of persistent minimum balance violations, a bank may close your account. This can be inconvenient and can also negatively impact your credit score.
How to Avoid Minimum Balance Requirements
- Know the Requirements: check your bank’s or credit union’s website or your account agreement to understand the minimum balance requirements;
- Choose Accounts Wisely: look for accounts without minimum balance requirements. Some institutions have no such requirements, while others may only apply them to certain accounts. Compare multiple institutions to find the best options;
- Set Up Direct Deposit: arrange for your paycheck to be automatically deposited into your account. Many banks waive minimum balance requirements and monthly fees with direct deposit;
- Use Recurring Transfers: establish regular automatic transfers between your checking and savings accounts. This can help you avoid monthly maintenance fees;
- Leverage Relationship Discounts: some banks offer fee waivers if you have multiple accounts with them, such as both checking and savings accounts;
- Monitor Your Balance: keep an eye on your account balance, especially if you frequently use your debit card, withdraw cash, or set up automatic payments. Ask your bank about setting up low-balance alerts to avoid falling below the minimum requirement.