A checking account holds your money and allows you to make deposits and withdrawals on demand. You can open a checking account with a bank, credit union, or similar financial institution. A checking account makes it easy to use your money for everyday transactions like bills and other purchases. Checking accounts may also be called transactional accounts or demand accounts.
How to Use a Checking Account
Unlike other types of bank accounts, a checking account allows you to make unlimited withdrawals and deposits. Due to its high liquidity, the money in a checking account is accessible in many forms: check, ATM withdrawals, debit cards, electronic debits, peer-to-peer payments, wire transfers, and other means.
Today’s banking technology allows you to make electronic transfers, replacing the need to write and mail paper checks—though some checking account owners still use them for specific purposes. You can pay bills and create automatic payments for your routine monthly payments through electronic transfers from your checking account. You can also make deposits, withdrawals, and transfers using smartphone apps.
Before banking was digital, people would balance their checkbooks with a paper register to keep track of their spending and reconcile their spending. Today, many people simply check their online accounts or export their banking information to budgeting software to keep track of their spending and account balances.
Some banks may charge you a monthly fee of up to $15 to maintain your checking account. However, they may also offer options to waive monthly checking fees. In some cases, the fees are waived if you set up direct deposit or maintain a certain balance. Some banks may also have a no-fee checking account that doesn’t have any monthly service fees.
Depending on how your bank account is set up, your checking account could allow you to make purchases for amounts that exceed what you have in your account. Your banks cover the deficit for a cost called an overdraft fee. Overdraft fees can be significant, so you should be careful with overspending in your checking account.
In some cases, banks could charge fees for multiple overdraft instances in a single day. Also, if your account stays overdrawn, the bank may charge you daily fees, in the form of interest, on the overdraft “loan.” Also, if your payment is returned because your account is overdrawn, some merchants may charge you a nonsufficient funds fee (NSF) if they cannot process your payment.
Fortunately, you can avoid overdraft fees. The first thing you can do is be mindful of your spending and not overdraw your account. Next, you can select a checking account with a financial institution with no overdraft charges, as some banks are beginning to abandon the practice of charging these fees.
You can also opt in to your bank’s overdraft protection feature. This service usually involves linking your checking account with your savings account or credit card. Overdraft protection gives the bank permission to automatically transfer funds from your savings or credit card account to your checking account if there's a deficit. However, the bank may still charge for this transfer, although usually much less than an overdraft fee.
Also, some banks may offer forgiveness for a set amount of overdraft charges each year. In some cases, you may be able to call the bank and ask them to remove the overdraft fee. Make sure to contact your bank to confirm if they offer this beforehand.
What’s the Difference Between a Checking and a Savings Account?
Checking and saving accounts are both types of deposit accounts, but they have some differences in how they operate:
- Checking accounts have lower interest rates. Checking accounts are known to accrue almost negligible amounts of interest. These days, savings accounts aren’t much better, but the interest rates are typically much higher than checking accounts interest rates. This means that it’s generally better for you to keep larger balances in a savings account rather than a checking account.
- Checking accounts come with a debit card. After setting up a checking account, you get a debit card that enables you to make withdrawals. Savings accounts don’t typically come with a debit card, however, you may be able to access your funds with one if you have a linked checking account with the same bank.
- You can make unlimited deposits and withdrawals with a checking account. As mentioned earlier, a checking account makes it easier to access your money whenever you need it. However, there may be a daily maximum limitation of how much you can withdraw from your checking account. Depending on your bank, this limit might range from $300 to $5,000 per day. With savings accounts, federal law limits your withdrawals to six times a month.
How to Open a Checking Account
You can open a checking account at any bank branch of your choice or on your financial institution’s website. Opening one will require that you provide your personal information. This includes your name, address, date of birth, and social security number, plus documents that verify this information. Sometimes the bank may do a credit check—a soft pull that won’t affect your credit negatively.
Your bank may also require you to make a minimum deposit to open your account. The starting deposit can be made by cash, check, or online transfer. Make sure you verify that your checking account is insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). In case your bank or credit union fails, this insurance protects you and helps you get your money back. Both the FDIC and NCUA give a $250,000 standard insurance amount per depositor, bank, or credit union.
After setting up your account, you can begin making deposits via direct deposit, an ATM, or over-the-counter transactions. Be mindful of keeping your account funded and read the fine print regarding account fees and terms you must abide by to keep your account open.
Summing it all up
A checking account is primarily for holding money for short-term use. When deposits hit your account, having them in your checking account is a quick, convenient way to handle your expenses and bills. If you are fortunate enough to have money leftover, move it to your savings or investment account for your long-term financial goals. That way, your expenses are paid, and your savings are separate with a better chance to grow.