What to Look for in an Internet Bank

The following is an excerpt from You're So Money: Live Rich Even When You're Not, a practical personal-finance guide by Farnoosh Torabi, a senior correspondent for TheStreet.com. The book is aimed at young adults who want to live beyond their means, but spend within them. This excerpt explores the best way to choose an Internet bank.

Picking an Internet Bank

I already feel guilty for using the word homework. I see that word all the time in financial how-to books, without any practical, qualifying instructions. Closed-end messages like "Avoid cyber theft: Do your homework," or "Avoid bankruptcy: Do your homework."

Thanks, but what is in the lesson plan, exactly?

So here's my assignment for what to look for in an Internet bank that will keep your money safe and growing.

1. Dual Presence

Narrow down online banks to those that have a nearby physical location, too, with humans who can help you in case of an emergency. It sometimes beats waiting on the phone for a customer-service rep. And in some cases, face-to-face interaction still works best.

Online banks with no physical location, like www.ingdirect.com, www.everdirect.com, and www.univest.net, have their advantages as well, but they don't really serve as a sole place to stash your money. They're great supplementary savings banks. They're starting to offer high-yield checking accounts, too, but I'll dive into the pros and cons later in this chapter.

2. Check In With Credit Unions

Since I was 17 years old, I've had the same savings and checking accounts with the Digital Credit Union, or www.dcu.org, in Massachusetts. Sounds kind of dorky -- credit union. How and why am I choosing such an unfashionable bank? Well, my dad used to work for a division within Digital Equipment Corporation, which had an affiliated credit union offering perks like fee-free checking and competitive interest rates for employees and their families.

Generally speaking, credit unions are not-for-profit institutions, so they don't have to subject their banking clients to exorbitant fees, like for-profit banks do. And you don't necessarily have to be an employee or member of an organization to join a credit union. Being a tax-paying member of the community usually suffices. The one caveat to credit unions is they typically have fewer physical branches and ATMs than major bank networks. And now that I live in New York City, it's impossible to visit a DCU branch.

But I haven't needed a reason to go inside one during the past 10 years. Instead, if I have problems or concerns, I can get to a phone rep on the spot. The customer-service line is much faster than a larger financial institution's would be. The bank's online presence is crucial, and, frankly, I wouldn't be a member if it didn't have online checking capabilities.

At www.dcu.org I can transfer money to either my checking, savings, or credit-card account. I can also schedule payments to my mortgage lender and, of course, check my balances. And back before I direct deposited my paychecks, I used to mail in my checks with DCU's stamp-free deposit slips, which was pretty nice. The only downside was my money would usually get deposited some five days later. But now I can freely route my checks directly to DCU. To find a credit union near you, go to www.creditunion.coop.

3. Free Checking?

If a credit union isn't convenient or sexy enough, begin your search for an online commercial bank that offers "free checking." Free checking often means you are not forced to keep a minimum balance in your account and can write as many checks a month as you like. Just because you don't see free checking doesn't mean it doesn't exist. This isn't exactly a perk banks boldly advertise, so call up and speak with a rep to verify.

Cramer: Shop Like Farnoosh and Be So Money

4. What Are the Fees, Please?

Banks make most of their money from fees generated from you and me. Yep, that's right. That's why we need to be extra vigilant, read the fine print, and ask human reps what sort of damage bill an average client can expect. What if I use another bank's ATMs? What if I bounce a check? What if I close my account?

What if I don't feel like putting a lot of money into my savings account right now? Likely answers: Fee. Fee. Fee. And fee. But there are banks with fewer penalties for such things and that's where the homework pays off. Both www.bankrate.com and www.bankingmyway.com will even do some of it for you -- go to either site to compare fees for all the major banks both online and in brick and mortar.

5. How Fast Will My Money Grow?

In other words: What's the annual percent yield or interest rate on my checking and savings accounts? While some savings accounts can fetch as high as 5% annually, checking accounts earn relatively little interest at traditional online banks. In fact, the average APY for checking accounts with balances of $5,000 or more is only 0.36%, according to Informa Research Services. In some cases, then, it may be worth having a savings account at one bank and a checking account somewhere else.

More and more, online banks are offering higher APY checking accounts to woo us. But watch out; find out the minimum opening balance requirement, which may range anywhere from $1 to $2,500. Also, some banks, including the virtual ones, may charge a fee or offer less interest every time the monthly balance falls below the minimum requirement. At E*Trade, for example, the minimum balance of $5,000 receives a competitive 3.6% yield, but balances less than $5,000 earn just 0.5%.