Minimum account balance

What Is Minimum Account Balance?

A minimum account balance refers to the lowest amount of money an individual or entity must maintain in a deposit account at a financial institution to avoid fees or to qualify for certain benefits. This requirement is a common feature within retail banking and consumer finance, particularly for checking accounts, savings accounts, and money market accounts. If the balance in an account falls below the specified minimum at any point during a statement cycle, the account holder may incur a penalty, typically in the form of a monthly account maintenance fee.

History and Origin

The practice of financial institutions charging fees and requiring minimum balances has evolved significantly over time. Historically, banks often generated revenue primarily through interest rates on loans. However, by the late 20th century, particularly from the 1970s onward, deregulation and changing market dynamics led banks to seek new revenue streams. This shift contributed to the widespread adoption of various fees for basic banking products, including the introduction or increase of minimum balance requirements on accounts. For instance, the average monthly maintenance fee for a checking account in the U.S. nearly doubled between 1984 and 1988, with consumers facing rising costs for services that were once free, especially if they couldn't maintain the necessary minimum deposit levels.¹¹ This trend was partly driven by banks aiming to offset lost income from corporate lending as large corporations began to raise capital directly on public markets.¹⁰ More recently, the Consumer Financial Protection Bureau (CFPB) has highlighted concerns over "junk fees," including those related to maintaining balances, pushing for greater transparency and fairness in banking practices.⁹

Key Takeaways

• A minimum account balance is the lowest amount of money required in a bank account to avoid fees or access benefits.
• Failing to maintain the minimum balance can result in monthly service charges or other penalties.
• These requirements are prevalent in checking, savings, and money market accounts.
• Banks use minimum balance requirements to offset operating costs and encourage larger, more stable deposits.
• Understanding and monitoring minimum balance requirements is crucial for effective personal financial planning.

Interpreting the Minimum Account Balance

The minimum account balance requirement serves as a threshold set by financial institutions. Its interpretation depends on the specific terms and conditions of an account. For account holders, maintaining this balance is generally seen as a means to avoid additional costs. For banks, a higher minimum balance often indicates a more profitable account, as it provides the institution with more funds that can be used for lending or investment. Accounts with higher minimum balance requirements may offer more benefits, such as waived fees, higher interest rates, or complimentary services. Conversely, accounts designed for lower-income individuals or students may have lower or no minimum balance requirements, sometimes with fewer features or higher transaction limits. It is vital for consumers to review the disclosure statements from their bank or credit union carefully to understand the specific minimum balance requirements, associated fees, and any conditions for waiver.⁸

Hypothetical Example

Consider Sarah, who opens a new checking account at "Unity Bank." The bank informs her that the account has a minimum account balance requirement of $500. If her daily balance drops below this threshold at any point during the month, she will be charged a $12 account maintenance fee for that month.

In January, Sarah maintains an average daily balance of $750, never dipping below $500. She incurs no fee. In February, she pays a large utility bill, and her balance temporarily drops to $450 for a day before her paycheck is deposited. Even though her balance recovers quickly, because it fell below the $500 minimum account balance requirement, Unity Bank charges her the $12 fee for February. Sarah learns the importance of diligently tracking her budgeting and monitoring her account activity to ensure she consistently meets the minimum balance to avoid unnecessary costs.

Practical Applications

Minimum account balances are widely applied across various aspects of banking and financial services:

• Checking Accounts: Many standard checking accounts require a minimum daily or average monthly balance to waive monthly service fees. These fees, if incurred, can range from a few dollars to upwards of $15.⁷
• Savings and Money Market Accounts: These deposit accounts often have minimum balance requirements to earn stated interest rates or to avoid fees. Some also had historical limits on withdrawals, although federal regulations have changed. For example, the Federal Reserve's Regulation D previously limited certain transfers from savings accounts to six per month, a rule that was suspended in April 2020 to provide greater flexibility for consumers during the COVID-19 pandemic.⁶ While the federal requirement was removed, some financial institutions may still impose their own limits.
• Relationship Banking: Banks may offer premium accounts or relationship tiers that waive minimum balance requirements on individual accounts if a customer maintains a higher cumulative balance across multiple accounts (e.g., checking, savings, investments) with the same institution.
• Small Business Accounts: Similar to personal accounts, small business checking and savings accounts often feature minimum balance requirements that, if met, can waive service charges or provide additional business banking services.

Limitations and Criticisms

While minimum account balances serve a purpose for banks, they face several criticisms, particularly regarding their impact on consumers. One primary limitation is the potential for these requirements to disproportionately affect low-income individuals or those with inconsistent cash flows. Customers who struggle to maintain a specific balance can end up paying significant fees, which can further erode their funds and make it challenging to keep their accounts open. Such fees contribute to the issue of the "unbanked" or "underbanked" population, where individuals may resort to more expensive alternative financial services like check-cashing services.⁵

Critics argue that these fees can be viewed as punitive, especially when banks also profit from using the deposited funds. Furthermore, the complexity of fee structures and minimum balance waivers can be confusing, leading to unexpected charges. For instance, some consumers have reported being charged fees for inactive savings accounts even while maintaining other active accounts at the same bank.⁴ Regulatory bodies, such as the Consumer Financial Protection Bureau (CFPB), have actively scrutinized various banking charges, including fees stemming from minimum balance shortfalls, as part of broader initiatives to combat what they term "junk fees" that hinder consumer financial well-being.³

Minimum Account Balance vs. Account Maintenance Fee

The terms "minimum account balance" and "account maintenance fee" are closely related but refer to distinct concepts in banking.

A minimum account balance is a condition set by a financial institution. It represents the lowest monetary value that an account holder must maintain in a specific deposit account (e.g., checking, savings) over a defined period (e.g., daily, monthly average) to avoid certain charges or to receive specific benefits. It is a threshold that the customer's funds must meet or exceed.

An account maintenance fee, conversely, is a charge imposed by a financial institution. This fee is typically assessed on a recurring basis, often monthly, for the upkeep and administration of an account. The key point of confusion arises because, in many cases, failing to meet a specified minimum account balance requirement is precisely what triggers the imposition of an account maintenance fee. However, an account maintenance fee can also be charged regardless of balance, or waived for other reasons, such as setting up a direct deposit, being a student, or having a senior citizen status.² Therefore, while the minimum account balance is a condition to avoid a fee, the account maintenance fee is the actual charge itself.

FAQs

What happens if my account falls below the minimum balance?

If your account falls below the minimum account balance requirement, your financial institution will typically charge you a fee, often called a monthly service fee or account maintenance fee. Some banks might also reduce the interest rates earned on savings or money market accounts if the balance drops below a certain tier.

Can minimum balance requirements change?

Yes, banks and credit unions can change their minimum balance requirements and associated fees.¹ They are generally required to notify account holders of such changes in advance, often through statements or direct communication. It is important to regularly review your account terms to stay informed.

How can I avoid minimum balance fees?

You can avoid minimum balance fees by consistently keeping your account balance above the required minimum. Other common ways to waive these fees include setting up direct deposits, maintaining a certain total relationship balance across multiple accounts with the same bank, or qualifying for specific waivers offered to students, seniors, or military personnel. Some checking accounts or online-only banks may also offer accounts with no minimum balance requirements or fees.

Do all bank accounts have a minimum balance requirement?

No, not all bank accounts have a minimum balance requirement. Many online banks and some traditional banks offer accounts, especially basic checking accounts, that do not require a minimum balance. However, these accounts might have other conditions or offer fewer features. Similarly, certain types of accounts like Certificates of Deposit (CDs) require an initial deposit but typically do not have ongoing minimum balance requirements once opened.