Knowing and understanding all about checking accounts is key to be able to use them in their full potentials.
For those who are not quite familiar with this type of account, a checking account is a bank account that is normally used for day-to-day cash deposits, as well as withdrawals. It’s ideal for people who always need funds right away.
Funds are made accessible through the use of a debit card, by writing checks, or through online money transfers.
Although checking accounts and all the other bank accounts seem to be very helpful in a person’s day-to-day life, apparently, not all Americans are taking advantage of what banks can offer.
In fact, in an article published by The Associated Press (AP), it says that in 2017, an estimated 6.5 percent of U.S. households did not have a primary bank account (whether it be in the form of a checking or savings account). This number is down from 7 percent the year before, and from a high of 8.2 percent back in 2011. If translated into actual numbers, AP says that it is roughly 14.1 million American adults without a bank account.
Having checking accounts and/or savings accounts is essential. Unless of course, you want to keep your money easily accessible by just putting it somewhere at your house or that you do not mind earning interest from what you have.
Checking accounts, in particular, are important in ensuring your money is safe, at the same time, easily accessible, which means you can withdraw or use your funds anytime you need it. But, what is a checking account really? If you are a first-timer in safekeeping your money in a bank, what makes a checking account a good choice?
Well, we’re going to answer these questions and more as we talk all about checking accounts.
For your reference, however, here are what we are going to specifically talk about:
- Definition of a Checking Account
- Understanding Checking Accounts
- Differences Between Checking and Savings Accounts
- What You Need To Know Before Opening a Checking Account
- How to Open a Checking Account
- Taking Full Advantage of Your Checking Account
- What Is Overdraft Protection
- Checking Account Service Charges
- Checking Account Interest
- Pros and Cons of Checking Accounts
DEFINITION OF A CHECKING ACCOUNT
Checking accounts are deposit accounts that allow deposits and withdrawals. Also known as demand accounts or transactional accounts, checking accounts are liquid accounts, which means they are easily accessible through electronic debits, automates teller machines, and checks.
Checking accounts, unlike other bank account types allows multiple withdrawals, as well as unlimited deposits.
Checking accounts, as mentioned, are also called transactional accounts, because people normally use it to pay bills, at the same time, make the most of their financial transactions.
Normally, a checking account comes with the following account features:
- A free order of personal checks
- A debit card for ATM withdrawals as well as merchant purchases
- Allows sending funds through ACH transfers and wires
- Allows direct deposits from your employer or benefit plan
Furthermore, a checking account may also help simplify your day-to-day finances by simply automating payments and deposits.
For instance, employers can arrange a direct deposit of your paycheck into your account. That way, you receive the funds as soon as possible.
Moreover, there are banks that offer small cash incentives or perks like gift cards to those who open checking accounts, and at the same time, set up direct deposit.
If you are going to look at it, checking accounts lets you do a lot of financial-related stuff. Needless to say, it makes day-to-day transactions so much easier.
UNDERSTANDING CHECKING ACCOUNTS
Now, you know already the definition of checking account. But there is so much more you need to know and understand about this bank account type.
For one, you need to know that checking accounts can include either a commercial or a business account, a student account, and/or a joint account. It may also include many other types of accounts that offer the same features.
To give you more idea —
A commercial checking account, for instance, is used by businesses. It is also considered as a property of the business. Normally, business officers as well as managers are given signing authority on the account, which means they are authorized by the business’ governing documents.
Student checking accounts are also offered by some banks for free and will remain as it is until the account holder graduates from school.
Meanwhile, a joint checking account refers to an account wherein there two or more people owning the account. Usually, this type of account is used by married people. Both are given authority to write checks on the account.
Now, in terms of interest rates, since checking accounts are considered as liquid accounts, banks do not offer high-interest rates, or in most cases, they do not offer an interest rate at all.
On one hand, if held at a chartered banking institution, funds are guaranteed by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per individual depositor, per insured bank.
On the other hand, for those checking accounts with large balances, banks would normally provide a service to “sweep” the checking account. This action basically means withdrawing most of the excess cash in the account and then investing it in overnight interest-bearing funds. The funds are returned or deposited back into the checking account at the start of the next business day.
DIFFERENCES BETWEEN CHECKING AND SAVINGS ACCOUNTS
Since we are talking all about checking accounts, it is only right that we also discuss with you the differences between a checking and a savings account.
A lot of people are usually confused between the two. So, to give you a little clarity on this, here are some of the things that make one different from the other:
|CHECKING ACCOUNT||SAVINGS ACCOUNT|
|Allows multiple withdrawals and deposits||Does not allow direct payments from the account|
|Ideal for making direct payments||Requires large balances|
|Provides multiple payment options, including checks, ACH, debit cards, etc.||A limited number of withdrawals in a month|
|Pays little or no interest at all||Typically pays a small interest rate|
As you can see, both accounts do have a lot of differences.
One thing that makes checking accounts really stand out is the fact that most checking accounts allow a number of transactions that can be completed in a month. Savings accounts normally have limits when it comes to withdrawals. Needless to say, transferring funds are also limited with savings accounts, which is not the case on checking accounts.
Because of a federal law called Regulation D, a savings account does not offer a direct payment feature. The same law is also responsible for the limits of withdrawals you can make with your savings account.
So, to put it simply, if you are someone who needs to withdrawal a couple of times a month, who needs a channel to make direct payments, or simply wants your money to be liquid, a checking account is ideal for you.
If you are interested to know more about the difference between checking and savings accounts, check the video below by MoneyCoach:
WHAT YOU NEED TO KNOW BEFORE OPENING A CHECKING ACCOUNT
The reason why we put up this blog on all about checking accounts is for you to fully understand and decipher if you need to open a checking account instead of any other bank accounts out there.
So, to help you even more in making a decision, here are some of the things that you should know before opening a checking account:
- Minimum Balance Requirements – Banks do normally require a minimum balance in your account. Make sure to know how much so you get to gauge if you can manage to maintain the required minimum. Falling below a minimum balance would end up to you owing the bank money every month.
- Check Limitations – There are accounts that limit the number of checks or debit transactions on a daily basis. So, make sure to look into that as well.
- Bill Pay Transactions – Another thing that often limited is the bill payments you make daily. Look into this as well and see if they would work for your spending habits.
- Monthly Service Fee and Overdraft Fees – Some banks charge certain fees like monthly service and overdraft fees. Check this out as well, and see for yourself if the cost is worth it. Keep in kind also that there are banks that waive the fees as long as you meet certain requirements.
- Additional Features – Look into what other features do banks offer as well. Check if they offer mobile deposits and more that would make banking even more convenient for you.
As we would often say, before you sign up for anything, make sure to make time to do your own research. Compare banks and bank features and only settle for the best option possible. At the end of the day, you do not want to regret choosing a bank just because it’s the first one to accept your bank account application, right?
Make sure to choose a bank that offers the best deals possible.
HOW TO OPEN A CHECKING ACCOUNT
You already know all about checking accounts, or so you thought. We’re not even done yet!
This time around, we’re going to share with you the process of opening a checking account.
So, the money you found a bank that offers a checking account that meets your needs and preferences, the next step would be to open the account!
You do so by going to a branch, or if they provide a signing up online option, then, better.
Whether you go to the bank branch or you opt to open an account online through the bank’s website, make sure to keep your Social Security number, as well as a valid form of identification handy. Banks normally ask these documents or IDs to prove your identity.
Most banks, if not all, do not allow minors to open a checking account — unless you have a co-signer on the account, which normally is your parents or guardians.
Also, expect that the bank will run a quick background credit check when you open a checking account. So, if you have been reported to ChexSystems or other similar companies, you will, most likely be not granted an account. You will need to settle things up first. Banks will not risk losing money on you.
That’s all you have to do — generally speaking. But, it is always best to go ask your preferred bank on their process of checking account application as they usually vary from one another.
TAKING FULL ADVANTAGE OF YOUR CHECKING ACCOUNT
If you think we’re over and done, well, not yet!
There are a few more things you need to know about checking accounts.
Now, when you first open a checking account, you will be required to maintain a running balance to be able to track the amount of money you have in your account. At the same time, to avoid overdrawing.
It is important to keep in mind that the balance you get at the ATM or the one you see online may not always be recent as not all charges may have cleared your account yet, also, the bank may hold deposits for particular periods as well.
In addition, it is also important to balance your account monthly. This will help you catch any errors that either you or the bank have made.
You may also take advantage of all online as well as mobile banking features for convenience. Avoid fees by maintaining the minimum balances required on a monthly basis.
Lastly, set up a direct deposit and other automatic transactions to avoid going to the branch often. This makes banking more convenient as well.
WHAT IS OVERDRAFT PROTECTION
Overdraft protection refers to a line of credit offered by the bank so you can write a check or make a purchase beyond what you have in your checking without encountering any problem. Basically, the bank covers the difference.
While this may sound good, what many banks out there do not tell customers is that they actually will charge you for every transaction that causes your account to use the overdraft feature. That is why it is important that you ask everything about this feature with the bank first.
Furthermore, according to the account agreement, a lot of banks out there have provisions stating that in case of an overdraft, transactions will be grouped in the order of their size, not minding the order in which they occurred, which basically means transactions are grouped and the bank charges a fee for each of transaction made on the day you overdrew your account.
More so, if your account stays overdrawn, your bank may also charge daily interest on the loan.
You see, while overdraft protection is of help, it may also bring problems if you do not handle it well. More so, if you are not aware of it.
So, as we have said, make sure to ask, inquire from the bank regarding their overdraft feature.
CHECKING ACCOUNT SERVICE CHARGES
Technically, banks generate income from interest they charge customers who borrow money. However, banks also charge customers for the service they render.
Service charges exist to generate income from accounts that are not generating enough interest revenue to cover the expenses of the bank.
Generally, banks charge fees when customers fail to maintain the required minimum balance, write too many checks, or have overdraw an account.
However, if you are a loyal customer or a customer of a large bank, you can avoid these fees by simply asking politely. Customer service representatives’ at large banks are usually authorized to overturn charges if you explain the situation and ask them to cancel the charge.
Just take note though that these “courtesy cancellations” are given on a one-time deal only.
Apart from service charges, as earlier discussed, banks also charge overdraft fees. The amount varies from one bank to another so you better check on that.
But as said, these charges can be avoided if you follow the bank’s requirements and if you ask it to be waived as a way of courtesy.
CHECKING ACCOUNT INTEREST
Generally, banks do either offer a low-interest rate or no interest at all for checking accounts.
However, if you opt for an interest-bearing checking account, you better be ready to pay a lot of fees especially if you are not able to maintain a minimum balance.
The minimum amount is usually the combined total of all your accounts at the bank, which may include checking, savings, as well as certificates of deposit accounts.
Failure to maintain the required minimum balance means you are going to be automatically be charged a service fee, which usually comes out to around $15 on average.
For accounts like this, at this point in time, the average yield is only around 0.06% — this one’s based on a Bankrate study.
Furthermore, please take note that there are only a handful of banks that serve up free-interest bearing checking accounts without strings attached. But the thing is if you and the bank have a longstanding relationship, then, you may consider asking the, to waive the fee on your interest-bearing checking account.
PROS AND CONS OF CHECKING ACCOUNTS
Since we promised to share with you all about checking accounts, we are now going to give you the pros and cons of this account type.
Here we go —
- Does not have limits on how often you can withdraw money in a month
- Usually comes with personal checks and a debit or ATM card
- Tends to have lower interest rates as compared to savings accounts
- Funds are easily accessible through checks, ATM, etc.
- Allows fund transfers through ACH and wires
- Allows direct deposits from employers or from a benefit plan
- Some banks charge monthly maintenance fees
- Charges overdraft fees
- May have low or no interest rates at all
FINAL THOUGHTS ON ALL ABOUT CHECKING ACCOUNTS
As we have said earlier, before you apply for a checking account, it is important to first and foremost know and understand fully first the bank account type you are eyeing for – in this case, about checking accounts.
This will definitely help you see if the account type is indeed ideal based on your needs and preferences.