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What is a Checking Account?
By Stephanie Colestock MONEY RESEARCH COLLECTIVE
A checking account is an everyday product offered by a financial institution, such as a bank or credit union. This type of transactional account allows you to deposit funds and make withdrawals using a combination of checks, debit cards, ACH transactions, ATMs and in-person teller services.
Checking accounts serve a very specific purpose, which is different from many of the other types of accounts we may own (such as savings). So what is a checking account exactly? And with paper checks rapidly disappearing and being replaced by direct deposits, credit cards and debit cards, why do you need one?
Table of contents
- How does a checking account work?
- Types of checking accounts
- Checking account fees
- What do you need to open a checking account?
- How much money should you keep in your checking account?
- Checking vs savings account
How does a checking account work?
A checking account is a type of fluid, transactional bank account that serves as the primary hub for our everyday cash flow. We typically receive deposits, such as our paychecks, into a checking account and also make day-to-day payments from this account (think bills and typical spending), with both credits and debits occurring on a regular basis.
Money can be deposited into a checking account via ACH transfer, direct deposit, mobile deposit (for paper checks), or even as a cash deposit made at an ATM or with a teller. Withdrawals can be made by writing a check, using a debit card, requesting an ACH transfer, using a bank’s online bill pay system or withdrawing cash from an ATM or bank branch.
Checking accounts may pay interest on the balance held, though this is not guaranteed. The interest rate offered from a checking account is typically lower than that of a savings account, as well.
Types of checking accounts
There are many different types of checking accounts to choose from, depending on how you plan to manage the account and its intended purpose.
- Personal checking accounts — These accounts can be owned by one person or jointly held by multiple individuals. They are intended for personal day-to-day transactions and may or may not offer interest on the balance.
- Business checking accounts — Business checking accounts are designed for small businesses and their owners to help track and manage deposits and withdrawals for a company. They may have higher initial deposit and minimum balance requirements than a personal checking account and are only offered to business owners and their employees.
- Student checking accounts — Aimed at high school and college students, these checking accounts typically have no fees and low account requirements. They may also offer money management tools to help students learn how to be financially independent and better manage their money.
- Children’s checking accounts — it’s never too early to become financially literate, so it’s no surprise that kids’ checking accounts were invented. These accounts are usually fee-free with few (if any) account maintenance requirements. They can be opened by a custodial guardian and managed until the child turns 18. Children’s checking accounts sometimes offer fun account management tools and benefits.
- Reward checking accounts — As the name implies, these checking accounts offer rewards, often in the form of cashback, miles or points. Account holders usually earn rewards in exchange for their everyday spending.
- Interest-bearing checking accounts — Many checking accounts today offer interest on the balance held. Though this interest rate is usually lower than with other types of accounts (such as savings or money market accounts), it can still put money into the account holder’s pocket. Interest-bearing checking accounts can also have more stringent account requirements than ordinary checking accounts.
Checking account fees
Regardless of the financial institution and even the type of checking account, there are usually some fees that will have to be paid. Some of the most common checking account fees include:
Monthly maintenance fees. These are charged as a monthly service fee and are common with large banks and financial institutions. Monthly maintenance fees can often be waived if you keep a minimum amount in the account at all times, make a minimum deposit when opening a new checking account, initiate a certain number of transactions each month, or establish and receive direct deposits into the account.
There are also many free checking accounts to choose from if you want to avoid the hassle of potential fees altogether!
ATM fees. Most banks offer a network of ATMs that customers can use free of charge. Using an ATM that’s owned by another bank or institution, however, can result in additional fees. Out-of-network ATM fees can be charged both by the ATM owner as well as your own bank. Some banks may not charge their own fee for using another bank’s ATM, though, and may even offer to reimburse some or all of the fees that the other ATM owners charge. If you use your ATM card outside the US, you may also be assessed a foreign transaction or exchange fee.
NSF (non-sufficient funds) fees. If you spend more money than you actually have in your account balance at any given time, the bank may decline the transaction for non-sufficient funds (NSF). You may also be charged an NSF fee, even if the transaction didn’t go through.
Overdraft fees/overdraft protection. Some banks offer overdraft protection, which allows you to “overdraw” the account (or spend more than you have deposited) without the transaction being declined at the merchant. However, there is usually a fee for this convenience, in the form of an overdraft protection charge. Ironically, this is a fee you pay to avoid being charged other fees.
Overdraft fees are typically around $35 per incident, though this can vary from one financial institution to the next, and even between different types of checking accounts. Additionally, banks will often charge a separate overdraft fee for each transaction that occurs after the account is overdrawn, potentially compounding the effect.
Wire fees. Sending an outgoing wire or receiving an incoming wire to your checking account may result in a transaction charge from your bank. This charge, called a wire fee, may be added to domestic and/or international wire transfers, and can generally range from $15 to $35 per transaction.
Checking account owners may also pay fees or added costs for things like paper checks, replacement ATM cards/debit cards, printed monthly statements, or even using the bank’s online service to pay bills.
What do you need to open a checking account?
Opening a new checking account is usually a pretty simple process, and can even be completed in just a few minutes through some online banking platforms.
The exact requirements will vary from one financial institution to the next, and even between different types of checking accounts. In general, though, expect to need the following if you’re trying to open a new checking account:
- Personal identification — This can include your name, date of birth, address, email address, phone number and Social Security number, depending on the bank. You may also be asked to upload (or show) a government-issued ID.
- Employment verification — You may be asked to provide your income level or even proof of employment, such as a pay stub or tax return.
- Initial deposit amount — Some banks will require a minimum initial deposit amount; others may allow you to put as much (or as little) into the new account as you’d like.
- Funding account — Unless you plan to deposit a check through the bank’s mobile app, or make an in-person deposit at your local branch, you’ll need information about the account you’re using to fund your initial deposit. This includes the routing and account numbers, as well as the bank name and address.
How much money should you keep in your checking account?
Deciding how much money to keep in one’s checking account at any given time is a very personal decision. Because checking accounts don’t tend to offer a very high APY (annual percentage yield, or the interest that accrues on your balance), holding all of your savings in a checking account isn’t usually the best procedure. However, it can be important to keep at least some cash on hand in case of emergencies and for everyday transactions.
Depending on your financial situation and typical spending habits, you may want to keep enough money in your checking account to:
- Pay all of your monthly bills (or even two to three months’ worth!)
- Offer a small cushion in case bills are higher than expected (15-20% extra should suffice)
- Cover an emergency expense of $500 or $1,000
This magic number will look different for everyone. Keeping the right amount of money in your checking account can help ensure that you avoid overdraft fees and tight financial situations, though.
Checking vs savings account
Checking accounts and savings accounts can be very similar in many ways. They’re typically offered by the same banks and financial institutions, and customers can often manage both accounts (and even transfer funds between them) easily through a bank’s online platform.
However, there are some very important differences to note.
The first is that checking accounts are easy-access deposit accounts for everyday spending. There are no limits to how often you can make deposits and/or withdrawals from a checking account. The holders of savings accounts, on the other hand, are limited by federal law to no more than six withdrawals per month. Exceed that number and you may incur transaction fees, have your account converted into a checking account, or even have your account closed.
While checking accounts may offer interest on the balance held in the account, this isn’t guaranteed and rates aren’t always competitive. Savings accounts, however, are designed to earn interest on the money you don’t need to spend today, so they usually have higher interest rates.
Checking accounts often include paper checks and ATM or debit cards for withdrawals and transactions. Savings accounts may sometimes offer a debit card, but not paper checks. To make a withdrawal from many savings accounts, you’ll need to initiate an electronic transfer, make an ATM withdrawal, or visit a local branch.
Stephanie Colestock is a DC-based personal finance writer with nearly 11 years of freelance writing experience. She covers a wide range of finance-related topics and is currently working toward her CFP®️ certification. Her work appears on sites such as Business Insider, MSN, Fox Business, CNET, Investopedia, and more.