Young people venturing into the financial world for the first time may have questions about different bank account types. Generally, these questions center around checking and savings accounts. What is a checking account? What’s the difference between the two, and which account fits certain needs?
Fortunately, it’s easy to get a clear answer about checking and savings accounts, how they work, and what they’re each suited for.
Why Do People Use Checking Accounts?
Most of the time,
checking accounts are used to deposit and hold paychecks. Additionally, checking accounts can easily link to payment apps that make it easier for account holders to pay bills.
Most of the time, they’re meant to keep track of an account holder’s money for a short period of time. These funds usually go toward things like purchases and bills before they’ve been in the account long.
Checking Accounts and Fees
To keep and maintain a checking account, most banks require that account holders pay certain fees. For example, some banks require monthly maintenance fees. With these, the bank will take a certain sum out of an account holder’s account each month in exchange for having an account with the bank. In some cases, the bank waives the fee, especially if the account holder keeps a high balance.
Other fees include overdraft fees, which charge when an account holder attempts to use more money than what’s in their account at the time. Overdraft fees can run around $35 per month.
Using Checking Accounts
Consumers can set up checking accounts at bank branches or through a financial institution’s website. To deposit funds, account-holders can use automated teller machines (ATMs), direct deposit, and over-the-counter deposits. To access their funds, they can write checks, use ATMs or use electronic debit or credit cards connected to their accounts.
Advances in electronic banking have made checking accounts more convenient to use. Customers can now pay bills via electronic transfers, thus eliminating the need for writing and mailing paper checks. They can also set up automatic payments of routine monthly expenses, and they can use smartphone apps for making deposits or transfers.
Don’t overlook checking account fees there are things banks won’t widely advertise to people who aren’t reading the fine print, including contingent fees like overdrafts.
What is a checking account used for?
Checking accounts are handy, all-purpose places to keep money in the short- to medium-term. Your employer can directly deposit your paychecks in the account, you can link it to payment apps like Venmo and PayPal, you can pay bills from it and more. Checking accounts are a building block to managing your money and makes all kinds of financial tasks easier.
Checking Account vs Savings Account
There are a few differences between checking accounts and savings accounts. For one, a checking account will allow account holders to withdraw money as often as they’d like. However, there are sometimes limits on the sums of cash a person can withdraw in a day. With savings accounts, the funds tend to stay in the account longer, for savings purposes. This means that withdrawals from a savings account are usually limited by frequency or amount.
Checking accounts are meant to be for everyday expenses, so oftentimes, an account will come with a debit and/or ATM card. This way, the funds are accessible and an account holder does not have to visit the bank to withdraw money.
On a less positive note, checking accounts tend to have lower interest rates for account holders. This is because the funds in these accounts move in and out frequently. Higher-interest savings accounts usually build steadily in value.
For people who are working and intend to pay bills using a bank account, the smartest choice would be setting up a checking account. If an account holder plans to let their money grow in value, a high-interest savings account might be worth considering.
Checking Accounts and Banks
Offering checking accounts for minimal fees, most large commercial banks use checking accounts as loss leaders. A loss-leader is a marketing tool in which a company offers a product below its cost or market value to attract consumers.
The goal of most banks is to attract consumers with free or low-cost checking accounts and then entice them to use more profitable offerings such as personal loans, mortgages, and certificates of deposit. However, as alternative lenders such as fintech companies offer consumers an increasing number of loans, banks may have to revisit this strategy.
Banks may decide, for example, to increase fees on checking accounts if they cannot sell enough profitable products to cover their losses.
How Do Checking Accounts Work?
They’re called checking accounts because, traditionally, they offer you the ability to write paper checks. A check is a financial instrument you can use to transfer money from your bank account to another person or another entity.
For example, if you borrow money from a friend, you could write out a check to them to pay them back. Or, if you need to pay your electric bill, you could write a check to the utility company for the amount you owe. The person or business you write a check to deposits it into their checking account. Their bank processes the check and the money is withdrawn from your account and credited to theirs.
Checks aren’t the only way you can spend money with a checking account, however. You also have these options for moving money in or out of a checking account.
Debit cards. Debit cards bearing a Visa or Mastercard logo can be used to make purchases in stores or online and make deposits or withdrawals at ATMs.
ATM cards. ATM cards can be used to make deposits or withdrawals at ATMs, but you can’t use them for purchases.
ACH transfers. ACH or electronic transfers allow you to schedule deposits or withdrawals, including bill payments, to and from your checking account that take place online.
Wire transfers. Wire transfers can be used to deposit or withdraw large sums of money to other bank accounts in the U.S. and foreign countries.
Different Types of Checking Accounts
Checking accounts aren’t all alike and there are several types you could choose from, depending on where you decide to bank. Here’s an overview of some of the most:
1. Standard or Traditional Checking
A standard checking account is a basic checking account you can use to pay bills, write checks and make purchases using a debit card. This type of account may have minimum balance requirements, meaning you need to maintain a certain balance daily or monthly to avoid paying a maintenance fee. There also may be a minimum deposit required to open a standard checking account.
2. Interest Checking
Interest checking accounts are very similar to standard checking accounts, with one key difference: You can earn interest on your balance. While interest checking accounts do not require a higher minimum to open the account, at some banks the rate of interest you earn can vary, depending on the account balance you maintain. Many credit unions offer competitive interest rates on checking accounts.
3. Rewards Checking
Rewards checking accounts may or may not pay interest and they offer the chance to earn rewards when you spend. Similar to a rewards credit card, you may earn points or a set percentage of cash back for making purchases, paying bills or scheduling direct deposits into your account each month.
These accounts are less common than standard or interest-bearing checking accounts. It will pay to shop around, as a minimum is required, and the rate at which rewards are earned, will vary.
4. Student and Teen Checking
Student checking accounts are designed for students who are new to using checking. These accounts typically have a minimum and maximum age range to qualify. For example, teen checking accounts are typically designed for kids aged 13 to 17, while student checking accounts may be for students aged 17 to 24.
The biggest advantage of student and teen checking accounts is that they often have little to no fees. Or if they do charge a monthly fee, they offer simple ways to avoid it, such as maintaining a low minimum balance or setting up a monthly direct deposit.
