Bank accounts 101: Opening an account, banks vs. credit unions, fees and more

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Almost every Canadian has a bank account and there are branches everywhere – banks are so ubiquitous most of us don’t give them much thought. But knowing how banking works can help you make, and save, a lot of money. In a bid to know more about banking, we asked the experts to walk us through the basics.

Why exactly do I need a bank?

There’s a reason that more than 99 per cent of Canadian adults have a bank account: It’s pretty much impossible to get through life without one. “In this day and age, you need a bank account to deposit your paycheque, pay your bills and make many purchases,” says Halifax-based money coach April Stroink. “Most everything in life now requires a bank account.”

Aside from the pragmatic reasons, a bank account is the simplest means to build wealth, through the miracle of compound interest. A hundred-dollar bill that’s been sitting in a drawer since 1950 is still worth $100; had you put it in a basic savings account earning a humble 2 per cent, it would now have grown to more than four times that amount.

Banks also constantly introduce new technologies to make things easier. While shopping with cash will never change, electronic transactions get faster, simpler and more innovative every year.

How do I know my money’s safe in the bank?

Whatever hacker or heist movie you might be imagining, your money is far safer in a bank than anywhere else. That’s because it’s insured. “Your deposits are protected through the Canada Deposit Insurance Corporation,” explains Mathieu Labrèche, spokesperson for the Canadian Bankers Association. This usually protects up to $100,000 per holding, including those in savings and chequing accounts, GICs, money orders and bank drafts. (It does not include mutual funds, stocks and bonds, ETFs and cryptocurrencies.) It protects against physical hazards such as robbery and fire, as well as fraud and cybercrime, and against the risk – however slight these days – that the bank will go under.

The banks themselves, of course, work hard to keep your money safe. “Canada’s banks have invested heavily in technology and security measures to protect the financial system and the personal information and money of their customers,” Mr. Labrèche says. Should anything fishy happen in your account, you can simply call the bank, which has ample resources to deal with the matter.

When should someone open their first bank account?

Any Canadian citizen has the right to open a bank account, even if they don’t have a job, don’t have any money to deposit, or have declared bankruptcy in the past. In fact, a bank cannot refuse you unless it has grounds to believe you’ve got plans to use the account for illegal or fraudulent activity (for example, if you knowingly gave them false information).

A person can open an account from the age of 12 without being accompanied by a parent or guardian. Details and specifics vary, but all the big banks offer some kind of youth saving account with extra perks and no monthly fees: Scotiabank’s Getting There Savings Program for Youth, for example, has no monthly fees, unlimited debit transactions and collectible Scene points that can be redeemed when shopping, for example, or dropping $30 on a Marvel film. The account is available to anyone between 12 and 19, though kids under 12 will need a parent or guardian to sign on the line.

How young is too young for a bank account? You could, and lots of parents do, open an account for your child – or even your new baby – any time. But if the goal is financial literacy rather than monetary gain, the best time for a kid to get an account is whenever you give them a piggy bank. “In my opinion, as soon as your kids can count and do basic math, they’re ready for a bank account,” says McGill University personal finance professor Benjamin Croitoru, whose online personal financial literacy course might be less popular if more people started learning about money earlier.

That’s not the only reason to start young. “It’s also important to establish long-term financial relationships with your bank,” adds Ms. Stroink. “In the future, if you want to borrow money for a car or a line of credit for school, having an existing relationship with a bank is going to be so helpful.”

What do I need to open a bank account?

“Generally, you will need two documents that confirm your identity to open a bank account,” Mr. Labrèche says. You’ll need original copies of one document with your name and current address and another with your name and date of birth. Examples of these include government-issued ID (such as passports and drivers licences), tax assessments, recent government-issued benefit statements, public utility bills or credit card statements. A list of acceptable documents can be found at Canada.ca and on the Canadian Bankers Association website.

If you’ve only got one of the above, notes Mr. Labrèche, you are not automatically disqualified from getting a Canadian bank account. “It’s possible to present one piece of identification if your identity can be confirmed by a customer in good standing with the bank or by an individual of good standing in the community,” he says. So if you’ve got one piece of ID and a friend who can vouch for you, bring them with you to the bank.

What kinds of fees will I need to pay?

Every bank account is going to have fees – even the so-called no-fee accounts, which really means “no monthly fees” and will no doubt ding you in other, sometimes surprising ways. That’s why many of us prefer to pay an upfront monthly maintenance fee, typically somewhere between $4 and $15, though they can go as high as $30 and beyond. Why pay more than $300 annually? Because the higher your maintenance fee, the more perks you’ll enjoy. If you’re going to be dinged every time you exceed your monthly transaction limit, for example, it might make sense to pay a larger fee upfront for unlimited transactions. Other accounts are “no-fee” only if your balance stays above a certain threshold – dip below that, however, and it will cost you.

If you can adhere to the conditions of your particular account, then you will avoid additional fees. But life happens, and so do mistakes. If you overspend the amount in your account, for example, you’ll get a non-sufficient funds (or NSF) charge. (You can avoid these with overdraft protection which, of course, also carries a fee.) Most banks will let you use their ATMs as often as you want, but if you get lazy and hit the convenience store’s machine, that’s a fee. If you use your card to make a purchase in a foreign currency, you might pay a foreign-transaction (FX) fee. Wire transfers, savings withdrawals and bouncing a cheque all can result in additional, sometimes surprise fees. Always read the fine print and try to bank accordingly.

Do I just need one bank account?

Oh, to be a kid – with a single savings account – forever! But soon you’ll want a phone plan and a few years later maybe you’ll need to make car payments … all things that require a chequing account. By the time you move out of the family home or on to higher education, you’ll definitely need one to pay your rent or tuition. (Great news on that front: low- or no-fee student accounts are abundant.)

Those are pragmatic reasons to open a chequing account, but there are psychological reasons, too, why a single account isn’t where you should dump all your cash. Ms. Stroink says that if you see it, you’ll probably spend it, and this is why people put emergency funds and RRSPs in separate, less-accessible spots with a clear purpose so you don’t succumb to the very human impulse to squander your savings.

What are the different kinds of bank accounts?

Big banks advertise countless kinds of accounts, with endless variations and rates and rewards on offer within them. But everything from business or joint chequing accounts to high-interest or tax-free savings accounts basically fall into one of two main categories: Chequing or savings.

What differentiates them is how you use that money. “A chequing account is for daily transactions,” Ms. Stroink says. “This is where your income goes in and your mortgage, bills and groceries come out.” Since that balance is climbing and falling, every single month, your chequing account is not for making money through earning interest. Some chequing accounts don’t pay any interest while many pay just a small fraction of 1 per cent; rather than making money here, it’s far more likely that you’ll be paying the bank via a flat monthly fee or fee-per-transaction for the privilege of using the account.

Whatever money you have left over can (and should) be moved into a savings account, where the bank will pay you to park it via higher interest rates and lower service fees. (Since you won’t be using it much you won’t require much service.) “Your savings account, whether for vacations or a new car or whatever, is money set aside so your brain understands that that money has a specific job in the future,” Ms. Stroink says. For this reason, many people don’t ever use a debit card to access their savings account. For letting the bank hold your money these days, a savings account will earn you interest somewhere between 2.5 per cent and 4 per cent.

“As soon as you have a little bit of money saved there, it’s time to start learning about accounts like RRSPs and TFSAs,” Prof. Croitoru says. Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), Registered Disability Savings Plans (RDSPs) and Registered Education Savings Plans (RESPs) are all ways of saving money at a bank, though you can also open them at a credit union, trust or insurance company. Wherever your money sits, all these have one big thing in common: “The sooner you start, the better, because you’ll be better off in the long term,” he says.

From there, says Prof. Croitoru, people should move on to learn about investing: “It’s really not that complicated.” (It’s not, but it is a whole other subject.)

What are the ‘Big Five’ banks in Canada – and what are the rest?

The “Big Five” is a colloquial term referring to the five largest financial institutions in Canada. In no particular order, they are the Royal Bank of Canada (RBC), Bank of Nova Scotia (Scotiabank), Canadian Imperial Bank of Commerce (CIBC), Bank of Montreal (BMO) and Toronto-Dominion Bank (TD Bank). More officially, the Big Five are Schedule 1 chartered banks, which means they’re licensed by the federal government to operate under the Canadian Charter and the Bank Act. (Some people refer to the “Big Six,” which includes National Bank of Canada.)

Canada has more than 30 domestically owned Schedule 1 banks, including the Big Five and many more, such as Laurentian and Manulife.

Schedule 2 banks are Canadian subsidiaries of foreign banks, such as J.P. Morgan Bank Canada or AMEX Bank of Canada (both headquartered in the United States), HSBC Bank Canada (Britain) or ICICI Bank Canada (India). Schedule 3 banks are branches, rather than subsidiaries, like Capital One Bank (America) or Barclays (Britain). Unless banking is your business, you don’t need to know any of these detailed classifications – though you can probably see why the term “Big Five” has stuck around to simplify this for the rest of us.

What’s the difference between a bank and a credit union?

Historically, credit unions were started by farmers and rural communities who organized their own financial institutions in which they were all members. Now, credit unions have expanded to many professions, groups and locations, though each is still either provincially or federally regulated (mostly provincial). “Basically, if you are a member of the [credit] union you’re also a shareholder,” Ms. Stroink says. Because credit unions are non-profit, they either reinvest profits or pay them out as dividends to members, who also often enjoy better interest rates and lower fees. But credit unions have fewer branches and often have particular requirements to qualify.

The Canadian Credit Union Association reports that about 5.8 million Canadians use credit unions for their day-to-day banking at more than 200 credit unions across the country. Among the largest are Vancity, Meridian, First West and Desjardins. Credit union membership is particularly popular in Quebec and Western Canada.

And what about digital banks (such as Tangerine or EQ)?

Online banks such as Tangerine, Simplii and EQ are entirely digital banks. “They’re usually affiliates of the Big Five; for example, Simplii Financial is an online bank but it’s supported by CIBC,” Ms. Stroink says. Like everything else in the digital world, change comes fast and often. “There are also banks like Manulife that are coming into the market that are affiliated with credit unions,” she adds. Besides the obvious, what also differentiates a digital bank is service fees. “Fees will be much lower, or they’ll be none at all, just because they don’t have brick-and-mortar locations with overhead to maintain,” she says.

Why would anyone willingly pay more to bank in person? Because the times in life you have a real banking question or problem, you may well want a familiar face – or voice on the phone – to help. Or maybe not. “If you just talk to whoever’s around when you call the bank, consider that the fees you pay at your bank pay for the personal service that you’re not using,” she says. In that case, a digital bank might be best for you.

And a quick caveat on that familiar face you are paying for: “Realize that whoever you deal with at the bank, however friendly, they aren’t your friend, they’re an employee of the bank tasked with making profits for the bank,” cautions Prof. Croitoru.

Are fintechs (such as Wealthsimple or Koho) banks?

A new crop of financial companies has risen up over the last decade or so that are aimed at millennials and Gen Zs who do everything through apps. Think Wealthsimple, Neo Financial and Koho. Known as fintechs, they offer banking services such as RRSPs, TFSAs and other investment accounts, as well as credit cards and even chequing accounts. They are not banks in the traditional sense but are typically affiliated with banks or financial institutions in order to provide Canada Deposit Insurance Corporation coverage.

How do I choose the best bank for me?

You can and should shop around and compare various offerings at various banks. Mr. Labrèche at the Canadian Bankers Association suggests starting with the online interactive Account Comparison Tool available from the Financial Consumer Agency of Canada (FCAC).

Whatever you find there, or elsewhere on the internet, know that you can and should ask for something even better. “You can absolutely negotiate the interest rate you earn and pay,” suggests Prof. Croitoru. No promises, of course, but in all likelihood you already have the upper hand. “Lots of this depends on how good a customer you are, but if you’re a responsible person who pays their bills on time, they know you can go elsewhere and they want your business,” he adds. If a bank doesn’t make you feel this way or the service offered is subpar, it’s time to change banks.

And before you sign on the line, as always, read the fine print. “Understand the fees you’ll be paying and the product you’re buying,” Ms. Stroink says. “Too often we just sign up for an account without understanding the fee structure or what we’re buying. Yes, the bank works for you, but it’s up to you as the consumer to do your research and know where your money is going.”

Key takeaways