How to properly break up with your bank

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Switching banks can be arduous, yet thousands of Canadians take on the task every year. Some Canadians switch banks because of circumstances prompted by a move to a new neighbourhood or city. Others switch based on dissatisfaction, perhaps due to poor customer service or high fees. Finally, some Canadians make the switch because they want to maximize potential perks and benefits.

Survey results from the recent Finder: Consumer Sentiment Tracker Q1 2023 report, where just over 1,850 Canadians were asked about the financial plans and priorities for 2023, found that just over 1 in 10 Canadians (11%) planned to switch banks this year.

The top three reasons for switching banks were:

To eliminate transaction fees (11.9%)
Find a bank account with a higher interest rate (10.5%)
Get cash back rewards (10.1%)

While switching banks has its benefits, if you fail to plan properly, the task can become an expensive lesson.

Unforeseen costs associated with switching banks can range from penalties for breaking a mortgage, prepayment fees for repaying an installment loan too early, loss of earnings after cashing out interest-bearing accounts, as well as transfer fees and closing costs. Then there are the forgetful fees — the interest and penalties you pay when you realize you forget to update automatic bill payments.

How to properly plan a bank breakup

A bank account is a tool, and for a tool to work effectively, it needs to fit your unique financial situation. To help properly plan a bank breakup, use these six steps.

Step 1: Research banks and choose the right one for your needs.

Banks and fintechs offer a variety of bank accounts, and comparing them all at once can be overwhelming. To make it easier, start with the bank account you will use most frequently: Your day-to-day bank account — your chequing account.

To find a chequing account that offers the features you need, you first need to review what each bank or financial institution currently offers.

Do the same when it comes time to review your savings account. Keep in mind, more than 20% of Canadians decide to switch bank accounts for two reasons:

To cut fees
To find a higher interest rate.

To find a savings account that will work for you, look for no or low-fee options with high ongoing interest rates. Also, pay attention to promo rates, as large boosts to your savings can help reduce the cost of switching banks.

Step 2: Open and fund the account

The next step is relatively easy since most banks and fintechs now offer online account opening options.

Step 3: Switch direct deposits and all automatic bills at the same time

The next step is the tricky part. It’s time to switch out all your deposits and automatic withdrawals from the old accounts to the new bank accounts.

To make it easier, list all transactions in your old bank account over the last two months. Then systematically update each account with your new banking information.

Step 4: Update all linked accounts

Once the day-to-day banking transactions are updated, it’s time to update all linked accounts of your new bank account details. Make a list of all direct depositors or linked accounts and systematically update each one. While the list could include companies like Paypal and Square, be sure to include annual transactions, such as the Canada Revenue Agency — where government support, tax rebates and credit payments come from, as well as provincial agencies.

Step 5: Offset fees with bonus offers

Many banks or financial institutions will offer sign-up bonuses or rebates for switching banks. To get these perks, be sure to read and match the requirements.

Step 6: Wait one month and then close the old bank account

Good news! Once you make it to step 6, you’re done with the process of setting up your new bank accounts. However, to make sure you don’t miss any bill payments or miss out on cheque deposits, keep your old bank accounts open for at least one more month. Monitor the activity and make any necessary changes. Once you’re comfortable that all bill payments and automatic deposits are switched over to your new account, you can notify your old bank that you wish to close the account.

This is also the time to make sure that the paperwork for all other banking products you opted to change is now in order. This includes mortgage documents, bank safety deposit boxes, and investment products and accounts.

While there are usually no fees to close a chequing or savings account in Canada, you need to be prepared for the legal requirements.

For instance, many of the larger banks will only allow you to close an account through an online process if the account balance is $0.

If you’d prefer to skip the last step of this process, be careful, as most banks will charge inactivity or dormant fees — and these can add up! Most banks charge between $20 and $50 for each dormant account.

Tips for Keeping Break-Up Fees Low

To help keep the costs low when closing out your old banking accounts, keep the following tips in mind:

Most big banks won’t charge a closing fee if the account has a $0 balance.
You end up paying fees if the old bank needs to transfer or wire an account balance to a new institution.
Credit cards are not tied to banks, so you don’t have to close your credit card when you switch banks.
If you decide to close a credit card account, you won’t need to pay fees, but you do need to pay off the outstanding balance. (Just remember to switch over any pre-authorized payments to the new credit card.)
You are not required to close personal, car, business or student loans when you switch banks. The same is true for mortgages.
If you do decide to close loans or mortgages, know that penalties and fees will be charged if this is done before the contract term expires.
Even if you wait until the contract term expires, closing a loan or mortgage will incur discharge fees — legal costs to confirm the closed debt on your credit report.

The Bottom Line

Switching banks takes work, but thankfully, much of the work required to switch bank accounts can be done completely online. Rather than spending time on the phone or in person, spend your time researching and choosing a new bank that offers the type of accounts you need at a cost-effective price. Remember to take the time to switch out automatic bill payments and cheque deposits and the potential costs associated with switching a bank account can drop to relatively little or none at all — making proper planning when breaking up with a bank well worth it.

About the Author

Romana King is the Canada Group Editor at Finder and a personal finance expert. As an award-winning personal finance writer and real estate expert, she has spent almost two decades helping Canadians make smarter money management decisions. Her first book, House Poor No More: 9 Steps That Grow the Value of Your Home and Net Worth, launched in November 2021, continues to be an Amazon bestseller and won the Excellence in Financial Journalism Book Award in 2022.

This article originally appeared on FinderCA and was syndicated by MediaFeed.

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