What Exactly Is a Checking Account?
A checking account allows you to manage your finances with relative ease and security. You’ll need to open the account at the bank and make a deposit before you can start using it. Most users will have their salaries directly deposited to their checking accounts.
The amount of money that you will have at your disposal equals the amount that you deposit, so unlike credit card accounts, checking accounts aren’t bank loans.
Still, users can have a negative balance on this account. If you attempt to make a transaction but have insufficient funds, at times, the bank will allow for the transaction to go through. However, you will be required to pay the money back and will encounter overdraft fees.
Checking accounts are also known as transactional accounts due to their nature. They’re designed to allow the users to withdraw their money as frequently as they need to and make transactions as often as possible (as long as there are enough funds on the account).
You cannot use your checking account to rebuild your credit score because your activity is not reported to credit bureaus. However, if you overdraw your account or write a bad check, your bank can turn your debt over to a collection agency that does report to credit bureaus. Use your checking account responsibly to avoid damaging your credit score this way.
The Benefits of Using a Checking Account
The main benefit of using a checking account is that it allows you to transfer your money in and out of your account at will. As mentioned, it’s typically used for receiving monthly payments, such as salaries, and it can also allow you to pay your monthly bills quickly and easily.
Checking accounts have the added benefit of keeping your funds safe. Carrying cash around or storing it in your home is generally considered to be risky – in case you lose your wallet or your home is burglarized, you have no way of retrieving your money.
With a checking account, your money is safely stored in a bank where you can still conveniently access it any time you like, but you don’t have to worry about losing it. Most checking accounts are insured by FDIC (Explained) for up to $250,000.
There are a few ways that you can access the money you have in your checking account:
- Via paper checks
- Via electronic transfers
- Using ATM withdrawals
- Via debit cards
In case you lose your checks or debit cards, you can cancel them immediately and request to receive new ones.
While you will not lose the money you have in your checking account if you lose your checks/ debit cards, it’s still important to keep them safe. Most banks will charge a replacement fee, and there’s often a waiting period of up to 90 days until you receive your replacements.
As a user of a checking account, you have access to the cashier’s check that’s guaranteed by the bank. These checks differ from personal ones and are generally used for larger purchases.
Cashier’s checks are typically used in situations when a merchant doesn’t accept personal checks or credit card payments. As they’re much safer option than carrying large sums of money around, they’re quite popular.
To get a cashier’s check, you either need to have enough funds in your checking account, or you need to bring cash with you to the bank. When you request this check, you need to provide the bank with the exact information on who the check is for and what amount you need.
This information is printed directly on the check and cannot be changed. The bank will immediately remove the amount needed for the check from your account and set it aside, offering a guarantee that the payee will receive the money owed.
Cashier’s checks are typically used when making down payments on new cars or real estate, making security deposits for rental apartments, and in situations when money needs to be settled fast.
Most banks and issuers require you to pay a fee (usually no higher than $15.00) to receive a cashier’s check. If you often need to use cashier’s checks, look for a bank that doesn’t require a fee for them.
Types of Checking Accounts
Since checking accounts are mostly used for routine banking transactions, most users believe that all checking accounts are created equal.
However, when you go to open your first checking account, you’ll notice that many banks offer a few different types.
The following are the most common types of checking accounts that you’ll find in different banks.
Regular Checking Account
As the most basic type of checking accounts, these accounts allow you to make deposits and transactions with ease. You can use an ATM to withdraw cash, and you can write personal checks, use your debit card for making purchases, and more.
Typically, you will need to pay a monthly maintenance fee to be the owner of a regular checking account.
Since the depositors frequently access these accounts, banks do not use the money from them for their in-house business. That means that you likely won’t receive any interest on your balance, and if you do it will be quite low.
If you want to receive interest on your balance, your best option would be to open a savings account in addition to your checking account. Even if your bank pays you interest on the checking account, it will be much lower than what you could receive on a savings account.
Premium Checking Account
Premium checking accounts are for those people who would use them for more substantial sums of money (normally over five figures). These accounts come with a few advantages and could be a better choice if you have a higher salary.
Most banks will require no monthly maintenance fees for these accounts, and the users can often get reimbursements for ATM fees, free checks, discounts on other financial services, and more. They’re suitable for families who often withdraw cash from ATMs and who have high regular monthly payments such as mortgage payments, student loans, insurance, etc.
ATM fee reimbursement is only applied if you use the ATMs within your bank’s network. If you want to take advantage of this perk, open a premium checking account at a bank with enough ATMs in your vicinity.
Interest-Bearing Checking Account
Few banks will offer to pay interest on your checking account balance, but you can still find those that do. The interest rates will be much lower than some savings accounts, although it’s still worth looking into them.
If you want an interest-bearing checking account, you’ll normally find two options. The first option allows you to receive variable interest rates which pay more when you have a higher balance, and less when you have a lower balance. The second option gives a flat interest rate regardless of your balance.
Interest-bearing checking accounts will often come with higher fees, and you need to take them into account. If the fees are too high, you’ll generally be better off with a free checking account with no interest.
Free Checking Account
As its name suggests, a free checking account doesn’t have any monthly maintenance fees. You can open the account and use it without making any additional payments.
While it is free to open the account and use it, it doesn’t mean that it’s completely free. You’ll often be required to pay for check fees, out-of-network ATM withdrawal fees, stop payment fees, and more.
Lifeline Checking Account
Lifeline checking accounts are for those users who can only maintain a very low balance on their accounts. Hence, they’re often known as low-balance accounts as well.
Banks will typically have no minimum balance requirements for these accounts, but there are a few limitations. Users often won’t have access to checks or will have a limited number of checks per month, and they cannot make overdrafts.
Second-Chance Checking Account
Second-chance checking accounts are available to those users who’ve had their checking accounts closed due to unpaid negative balance. They’re not ideal solutions but are the only choice for those who failed to pay off their debt.
Banks will require a monthly fee of around $20.00, depending on the bank and your financial situation, and you typically won’t have access to some of the perks of a regular checking account. Overdrafts will be denied, and you might encounter higher overall fees.
You’ll need to be a responsible user of this account for at least a year before you become eligible for opening a regular checking account.
Joint Checking Accounts
Regardless of the type of account, you can be eligible for opening a joint checking account. As its name would suggest, this account can be used by two or more individuals who have access to the same perks and features.
Commonly used by spouses or business partners, joint checking accounts allow for equal access by all authorized individuals. This means that anyone listed on the checking account can deposit funds, withdraw them, make transactions, pay bills, and more.
It also means that anyone on the account can even drain and close the account without notifying other authorized users.
Only open a joint checking account with a person you trust completely. These accounts can be great for spouses, parents, and children, business partners, or in situations where one account holder is sick, and the other is responsible for taking care of them.
Fees You Can Encounter with Checking Accounts
As with any bank services, the users must be aware of the different fees they’ll be expected to pay. A bank or other financial institution is required by law to provide information about rates and fees to its clients.
The figures will differ from bank to bank, and if you want to find out exactly how much you’ll be expected to pay in fees, you’ll need to contact your bank directly.
With this in mind, here are some of the most common types of fees you can encounter with a checking account:
- Maintenance fee (paid monthly)
- Minimum balance fee (paid when the balance on your account is lower than required)
- Overdraft fee (paid when there’s a negative balance on your account — this fee is normally the highest)
- ATM fee (paid for making ATM withdrawals, typically not applied when using ATMs within your bank’s network)
- Paper statement fee (you can normally check your statement online for free, but will be required to pay a fee if you want to receive a paper statement)
- Returned deposit fee (applied when your check bounces because of insufficient funds)
- Foreign transaction fee (applied when withdrawing money or using your debit card in foreign countries)
Depending on your bank and the type of checking account you have, you might encounter additional fees, or some of the fees mentioned above might be waived. You will need to check with your bank to find out the exact fees that you’ll be required to pay.
How to Choose the Right Checking Account
It can be challenging to find the right checking account that suits all your needs, so it’s essential to do thorough research before you open an account with a bank.
You will likely be using this account regularly for paying bills and making purchases, and you’ll want to weigh your options.
Here are some of the more important things that you should keep in mind when choosing the right checking account that meets your needs:
Almost everyone with a checking account uses ATMs to make withdrawals. While ATMs are widely available virtually everywhere, you’ll still need to consider them before you open your account.
Most banks will charge a fee for using ATMs outside their network, so to save money, you should open an account with a bank that has plenty of ATMs in your vicinity. It’s cheaper and more convenient this way.
2. Your viable balance
Regular checking accounts often have a minimum balance requirement that you must meet if you are to avoid paying fees. Be realistic about your financial situation, and make sure that you can meet your bank’s minimum balance requirements comfortably.
3. Fees and perks
Lowest fees often come with fewer perks for the account holder. While it seems like your best choice is to go for a bank that offers the least fees, sometimes the extra perks that come with the higher fees are well worth it.
Compare and contrast the fees and perks offered by different banks to find out what kind of account suits you best.
4. Online banking features
The ability to manage your bills online, check your balance over the internet, or enjoy online shopping with your debit card is quite important. Make sure that your bank offers online banking because it provides greater convenience.
With this in mind, you should also try and find a bank that has a branch office in your area. If you have questions or concerns about your account or need to handle a certain problem, it’s often easier to deal with it in-person than via email.