03 Jun What Is a Checking Account?
Handy and perfect for short terms, a checking account is often used for day-to-day transactions like cash deposits and withdrawals. Also known as transactional accounts, these accounts are very liquid, unlike savings accounts. The funds deposited in a checking account can be accessed through ATMs, checks, and electronic debits.
But, what exactly is a checking account?
Read on to find out what they are and how they can provide you with a smooth banking experience.
What Is a Checking Account?
A checking account is an account that allows you to make unlimed deposits and withdrawals on a day-to-day basis. You can make daily transactions to the account by depositing a paycheck or withdrawing the funds through a debit card.
Because these bank accounts provide easy access to your funds, they are highly liquid compared to other bank accounts. And while they might have maximum limits for daily transactions, you can make unlimited withdrawals and deposits over time.
The primary purpose of a checking account is to keep your funds secured for a short period so that you can cover your daily expenses and then move the remaining funds to a savings or investment account, where they can grow over time.
However, if your main aim is to save up for buying a home or a car, keeping your funds in a checking account might not be a great option. This is because they earn a very nominal interest rate. It is recommended you move your savings to an investment or savings account so they can make significant interest.
Checking accounts can be commercial accounts, student accounts, or joint accounts. Some banks might also be willing to offer other types of bank accounts, depending upon your eligibility.
How Checking Accounts Work?
You can open a checking account online or by visiting a bank. You can make a deposit by submitting a check or accepting payments from other account holders. To make withdrawals, you can use ATMs or debit cards. Checking accounts offer high liquidity, allowing you to make deposits and withdrawals instantly.
Moreover, with the ongoing advances in the banking industry, you can make electronic transfers, pay bills online or set up electronic payment deductions for routine expenses.
In addition to this, there are two types of fees associated with a checking account. First, an overdraft fee is assessed if you make a transfer that exceeds your bank balance. You can avoid this fee by signing up for overdraft protection or linking your savings account to the checking account if the latter falls short of funds. Second, a monthly service fee, which ranges up to $15. You can, however, get this fee waived off if you meet certain conditions like maintaining a minimum balance.
Types of Checking Accounts
Several banks and credit unions offer a wide variety of checking accounts. Here’s a brief on the most common checking accounts.
Personal transactions like accepting a payslip or withdrawing money for personal expenses use a personal checking account. The money is not kept safe for making an investment or savings.
A business checking account is usually used to conduct transactions related to businesses. A company might have one bank account for its employee’s salary while another for operational expenses. It’s common for a single company to manage more than one business checking account.
These accounts might also charge you for the transaction made more than a set amount. It is mandatory to keep this cost in mind while making hefty transactions.
High Yield Checking Account
As the name suggests, a high-yielding checking account is a checking account that helps you earn higher interest on the bank balance.
Usually, when you open an account, the bank does not offer higher checking account interest rates on your bank balance. This is, however, accommodated by providing high liquidity to the bank account. You can easily make withdrawals and deposits at any time you want. However, if you are looking to make some money through earning interest on the account, a standard checking account might not be a great choice.
With a high-yielding checking account, this is possible. Depending upon the bank, you can get an APY of about 1% and up to 4%. However, to keep earning the high interest, you would have to meet certain conditions like maintaining a certain bank balance.
Joint checking accounts are accounts jointly owned by two people, mostly married couples or a parent and a child. The bank account allows the joint owners to manage their funds together.
Perfect for students ages 18-23, a student checking account offers several additional perks like forgiveness of overdraft fees, free checks, and ATM fee reimbursements. This checking account can be a great way to help students manage their funds while reaping the additional benefits provided by the bank.
Premium Checking Account
A premium checking account would provide you with additional perks that you would have to purchase otherwise. It includes perks like a free safe deposit box, official checks, personal checks, and fee waivers on some out-of-network ATMs.
In addition to the types listed above, there are several other checking accounts like rewards checking accounts, senior checking accounts, etc. Check with your bank to know what kind of accounts they offer.
Related Article: What is a Money Market Account and How Does It Work?
Checking Account Fees
Checking accounts might come with easy access to your funds and increases convenience. However, there is a downside to these bank accounts. You might be charged heftily for using ATMs or just having a checking account.
Here are some common checking account fees and how you can avoid them:
Overdraft fees hit you when you spend more than your bank balance, leaving your bank balance in negative numbers. This fee can go up to $35 and occur several times a day.
To avoid this fee, you should try to maintain a positive balance at all times. However, you can also sign up for the overdraft protection program, linking your savings account to a checking account. This will allow the bank to deduct the extra amount from the savings account if your checking account falls short of funds. While this program might cost you a little extra, the fee would be less than $35.
A withdrawal fee is exactly what it sounds like: a fee incurred when you withdraw the funds from your bank account. This can include making debit purchases out of an account, using an ATM out of your bank network or a different country, or making certain withdrawals.
You can avoid this fee by using a checking account that allows unlimited transactions. Use ATMs within your bank’s network to avoid unnecessary charges.
Another way to avoid withdrawal charges is to use a credit card to prevent the foreign debit transaction fee.
One of the most common fees banks charge is the monthly maintenance fee. This fee can go up to $15. You can avoid this fee if you meet certain circumstances like maintaining the minimum required balance, signing up for direct deposits, or opting for paperless statements.
If you use ATMs that are out of your bank’s network, you would be liable to pay two types of fees. One is the fees your bank would charge, and the second is the fees ATM operators would charge. The bank’s fees can go up to $1.63, while ATM operator’s fees can go up to $3.09.
To prevent paying the fess, stick to ATMs within your network. However, if you prefer using a particular ATM, you can also open a bank account in that ATM to avoid paying unnecessary charges.
Minimum Balance Fees
You may get charged a minimum balance fee if you fail to maintain a minimum required balance. Keep a set amount in your bank account to avoid unnecessary charges and penalties.
Using Your Checking Account
You can get various features ranging from direct deposits, electronic funds transfer, and ATMs with a checking account. Moreover, most banks might also allow unlimited transactions making the funds more liquid and accessible.
Here are some of the features of a checking account that are worth mentioning.
With the ability to draw funds freely, checking accounts makes paying bills relatively easy. In addition to this, some banks might also allow bill payments for free. However, you might incur some fees if you cross the maximum number of bill payments.
A checking account makes paying bills easy and safe through multiple features like online banking. Besides this, it offers convenience and safety from theft.
You can even set up automatic bill deduction for routine bill payments, which will be automatically deducted from your checking account.
Debit Cards and ATMs
If you stick to ATMs and automated teller machines within your bank network, you would not be liable to pay any out-of-network fees for transactions through your debit card.
Moreover, most checking accounts do not have any transaction limit so you can have access to unlimited funds at any point in time. Many banks offer electronic banking that can give you unlimited access to your funds.
However, use in-network ATMs to stay clear of any unnecessary deductions.
Direct deposit allows your employer to directly transfer your salary into your account so that you can access them immediately. Unlike the traditional check system, direct deposits will enable you to gain access almost immediately rather than waiting two days for the payslip.
Electronic Funds Transfer
Electronic funds transfer allows you to transfer funds from one bank account to another almost instantly using online features provided by the bank. You can either transfer the money within the same bank network or an account belonging to another bank.
This online transfer of funds is safe, quick, and enables you to access or send money to someone within seconds.
Related Article: What is the DOD Savings Deposit Program?
How to Open a Checking Account
While opening a checking account, you would need your social security number, government-issued ID, and personal details in hand. With that in mind, here are a few steps that would help you open a checking account.
Determine Your Needs
Firstly, evaluate what you want. Do you want to deposit your earnings, pay bills, write checks primarily, or do you need physical access to a branch or ATM? Moreover, how much money do you plan to keep in your account?
After having answers to these questions, know the basics. With a checking account, you’re able to pay bills, wire checks, and make debit card purchases. While the account won’t earn much interest, you would have easy access to your funds and ATM. Moreover, most accounts might not have monthly maintenance charges, given you meet certain conditions.
Compare Financial Institutions and Checking Account Types
There are about a million options for opening a checking account. Get in touch with top banks and find out what they need for you to open a checking account. Also, it is recommended to search for a bank that offers perks like low overdraft fees, no maintenance charges, and easy access to ATMs.
After this, compare banks and the benefits you get to choose the best deal.
Identify Who Will Have Access
If you want your spouse or a parent to access your funds jointly, let the bank know that you are up for a joint account. Find out the eligibility criteria for that and what benefits you’ll get if you qualify for it.
Gather Application Materials
Once you decide where and what kind of account you want to open, gather all the documents required for opening the account.
To open an account, you’ll need your social security number, government-issued ID card, and personal details like name, address, etc. You might also need to make a minimum deposit to open the account.
Set Up Account Tools
You can set up tools like direct deposit, automatic bill payment, apps, safe deposit boxes, paper checks, and recurring transfers to make your transactions seamless.
Set Up Direct Deposit
After setting up the required tools, set up a direct deposit and give your employer the needed information so that they can transfer your salary to a checking account. Make sure to take note of your Checking account number. This will allow you to gain access to funds instantly.
Related Article: When to Use a CD over a Savings Account
Picking the Right Type of Checking Account For You
With the needed information in hand and knowing what you need, you are all set. You can access your funds anywhere you want, and anytime you need. In addition to this, setting up a checking account will make your transactions easy, secure, and fast.