What is a Checking Account and How Does it Work?

A checking account is a type of bank account which allows you to write checks using the money you deposit. These days, most people with checking accounts use ATM and debit cards far more often than they write checks. Checking accounts are the easiest type of account to use for small, frequent expenses, and they’re also commonly used to receive direct deposits. As a result, they play a larger role in daily life than any other financial product. For most consumers, checking accounts are the first point of encounter with the world of personal finance.

Definition of a Checking Account

Strictly speaking, the only thing that defines a checking account is the ability to write checks. However, modern checking accounts include debit cards you can use to withdraw money at an ATM or swipe to make direct purchases, just like a credit card. Some banks still include a free set of printed checks when you open an account, but the use of personal checks is steadily declining.

Checking Account: Typical Features

  • Debit card for ATM withdrawals and merchant purchases
  • One free order of personal checks
  • Direct deposits from your employer or benefit plan
  • Ability to send money with ACH transfers and wires

A checking account can also simplify your everyday finances by automating deposits and payments. Employers can arrange direct deposits of your paycheck into a checking account, so that you receive the money as soon as possible, while online bill pay can ensure that you always settle your bills on time. Making transfers to other people with bank accounts also becomes much easier when you have your own checking account.

Banks may also offer small cash incentives or other perks, such as gift cards, to open checking accounts and set up direct deposit. While these benefits can seem attractive initially, the most important thing for you to consider are the features and fees of the checking account itself.

Different Kinds of Checking Accounts

While the main features of checking accounts are fairly similar across banks, we’ve included a breakdown of the different types available on the market.

Type
Best For...FeaturesRestrictions and Drawbacks
Standard Customers who want reliable brick-and-mortar service
  • Lots of ATMs and branches available
  • Many also include online banking
  • Requires a minimum balance to waive monthly fee
  • Overdraft and ATM fees
Online Customers who don't need in-person bank services
  • Lower fees
  • Higher interest rates
  • Limited/no access to branch locations
Business Business owners
  • Higher spending and withdrawal limits
  • Tools for tracking business expenses
  • Higher minimum balance requirements and fees
  • Fees on excess transactions and cash deposits
Premium Customers with a large amount in deposits
  • More complimentary bank services
  • Some interest earned on deposits
  • Higher minimum balance requirements and fees
  • Interest rates are currently very low
Student Qualifying high school and college students
  • Low/no monthly fees
  • Good introduction to personal finance
  • Age limits or enrollment requirements apply
  • Low spending and withdrawal limits
Senior Qualifying seniors
  • Waived monthly fees
  • Free checks and no-fee money orders
  • Low availability
  • Often include unimportant "perks"
Second-Chance Customers with bad banking histories who can't get other accounts
  • Useful for rebuilding credit
  • Low opening deposit requirements
  • Low availability
  • Usually can't avoid monthly fee

Some banks don’t treat these types as separate products, but instead as special features added to existing checking accounts based on whether you meet certain qualifications, like student status or a senior age threshold. Regardless of their target audiences, all checking accounts share a number of important features. 

Monthly Fees: With truly free checking accounts getting harder to find, your account will probably be charged a monthly maintenance fee. Luckily, this fee is usually waived if your balance meets a daily minimum or a monthly average, or if the account receives a set amount in direct deposits. Generally, accounts with more service options and higher interest will require more fees and higher minimums. 

Spending and Withdrawal Limits: Every checking account has a daily limit on the amount that can be charged to the debit card, usually from $1,000 to $3,000. Cash withdrawals from ATMs are also limited to no more than $400 or $500 every 24 hours. Limits on writing checks are much rarer, but they should be another factor to consider. Since checking accounts have limits on large transactions, you may want to consider getting a credit card if you plan on making larger purchases.

Earned Interest: Finally, some checking accounts are interest-bearing, meaning that your account will earn a percentage of interest on the balance you maintain. The typical annualized percentage yield (APY) for interest checking accounts start at 0.01%, which is very low compared to yields among other financial products, such as savings or investment accounts. However, some online interest checking options can offer better rates, up to 1.00% APY. Interest checking accounts generally have higher minimum balance requirements and higher fees.

One thing to note about interest-bearing checking accounts is that unlike all other checking accounts, they are categorized as negotiable order of withdrawal (NOW) accounts and not demand deposit accounts. This usually makes no difference to consumers, but legally speaking, banks have the right to require 7 days' notice prior to withdrawals from a NOW account —a feature that is always disclosed but rarely exercised. 

Checking Accounts at Credit Unions

Credit unions are a non-profit alternative to traditional banking, in which the union's members each hold a share and appoint leadership to manage the organization. Credit unions provide all the services found at banks, though they may refer to certain accounts in different ways. For example, some credit unions refer to checking accounts as "share draft accounts". Due to their cooperative nature, credit unions typically charge fewer and lower fees than banks.

However, joining a credit union can be more difficult than signing on with a bank. Though a few of the larger credit unions allow you to join with a donation to a designated association, most credit unions restrict their membership by region or trade, so you will need to investigate the options available in your geographic and professional area. 

Checking Account Fees

Most checking accounts come with a variety of fees. Opening a checking account sometimes requires a fee in and of itself. Most banks charge a monthly maintenance fee, which may fluctuate based on your balance and usage of services.

Should you make a transaction that drops your checking account balance more than $5 below zero, your bank will charge you overdraft or nonsufficient funds (NSF) fees. The main difference between the two is that banks will charge an overdraft fee when they pay a charge that overdraws your account, while NSF fees are charged when the bank refuses to pay the charge. 

While the specific amounts charged vary by institution, most banks charge around $35 per overdraft or NSF item. Some checking accounts come with overdraft protection policies, which allow you to link other accounts or lines of credit to your checking account and pay a fee, usually $12.50, to ensure that your transaction is covered by transfers from those sources.

Non-network ATM fees and branch fees make up another category of account expenses. Using the ATMs of other banks typically costs $2.50 per transaction domestically and as much as $5 abroad. These fees are not as steep as the charges for withdrawing money in person at other banks with your debit card. In these instances, you will normally be charged $5 or 3% of the dollar amount you withdraw, whichever is higher.

Other common checking account fees include fees for wire transfers, printed statements, cashier’s checks and money orders. These incidental services will cost you $15 to $35, depending on the institution and service. 

Checking Accounts vs Savings Accounts

Checking accounts are more accessible than savings accounts, which are designed to store your money for the long term. There are legal limits to the number of monthly withdrawals from savings accounts; checking accounts, on the other hand, are linked to debit cards that provide free and easy access to your funds. As a result, many people maintain a checking account for daily use and a savings account to hold anything they want to use towards future expenses.

If you are looking at interest rates, interest-bearing checking accounts compare poorly to the rates found among savings accounts. APY figures usually do not exceed 0.01% for interest checking accounts, while savings accounts average at 0.06% among traditional banks and go as high as 1.05% for online-only banking. When it comes to earning interest, savings accounts, investment accounts and even certificates of deposit are more efficient than interest checking.

What You Need to Open a Checking Account

Before you open a new checking account, you should have a good idea of your financial habits and needs. How many times a week will you swipe a debit card, write a check or withdraw cash from an ATM? How much money will you keep in the account? How often will you be receiving direct deposits? Having answers to such questions will help you find a checking account that minimizes your fees and maximizes the convenience of your experience.

Once you select a checking account, you can apply to open it at the bank or online, depending on the kind of checking account it is. Typically, you’ll need to present government-issued identification, like a passport or driver’s license, and proof of address, like a utility bill. You also need to prepare an opening deposit, the amount of which varies by bank and checking account type.

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