A checking account is offered by a bank or credit union and is used by consumers to pay bills and expenses through paper checks, via a debit card or going online. Since there is generally no limit to the number of times you can access the money in the account, many people use them for daily expenses such as buying coffee, paying for parking or purchasing gasoline or groceries.
Most checking accounts are intended to pay for expenses and do not offer interest on your balance, unlike savings or money market accounts.
Since there is no limit to the number of times you can access the money in a checking account, consumers may use the account not only to pay bills and daily expenditures, but also for withdrawing cash via an ATM or bank teller.
You can choose to have your paycheck electronically deposited into your checking account once or twice a month, called direct deposit. You also may be able to set up for recurring payments such as rent, mortgage, auto loans or student loans to be automatically withdrawn from your account.
Many consumers have both a checking and savings account at the same bank or credit union, easily allowing them to move money between the two accounts. Any leftover money from your paycheck each month could be moved from the checking account to a savings account to earn interest or to save for an emergency. However, transfers from your savings to any other account, including checking, are limited to six times a month, according to federal law.
Key factors to consider when choosing a checking account:
- No monthly maintenance fee, or fee that is easily waived
- Extensive ATM network
- Reasonable overdraft fee policy
There are various checking accounts offered by traditional banks, online banks and credit unions. The most important factor to examine may be the fees. Some banks will charge a monthly maintenance fee. Other banks will only charge a monthly maintenance fee if the account falls below the minimum balance or does not have a regular direct deposit linked to it. While some banks charge nominal fees of a few dollars a month, others charge as much as $15, which can put a crimp into your budget.
Besides traditional banks and credit unions, checking accounts are also offered by digital financial services companies, says Evan Kulak, co-founder of Polaris Portfolios, a Chicago-based financial planning firm.
"Online banks, neo-banks and robo advisors offer checking accounts or checking account equivalents that often earn higher rates of interest than traditional players, while still providing clients with easy debit card access to funds," Kulak says.
Many banks have adopted a strategy of not charging fees, especially online-only banks.
If you use cash frequently to buy lunch, tip employees or pay for other expenses, look for a bank that has a large network of ATMs near your home, work or favorite hangouts. Using your bank's ATM network helps you avoid paying fees to withdraw cash.
Another common fee to watch out for is an overdraft fee. If you do not check your account balance often, you may try to spend more money than you have in the account. You could easily be dinged with a $35 fee each time it occurs.
"The banking industry has changed from an interest-earnings industry to the fee-income industry due to the prolonged near zero interest rate level," says K.C. Ma, a chartered financial analyst and director of the Roland George investments program at Stetson University.
If earning interest in a checking account is important to you, look for banks that offer interest for higher balances.
Some checking accounts that do pay interest offer a minuscule interest rate such as 0.01%, says Robert Johnson, a finance professor at the Heider College of Business at Creighton University.
"In fact, many consumers are lured into interest-bearing checking accounts that really end up costing them more money than a non-interest-bearing checking account with a different institution," he says. "Some interest-bearing checking accounts have a plethora of fees, including monthly service fees, ATM fees, overdraft protection fees, wire transfer fees and foreign transaction fees. A consumer may actually be better off with a non-interest-bearing checking account that is accompanied with fewer fees."
There are many ways to open a checking account, whether it is individual or a joint account. Going to the local branch of a bank or credit union is one method but can take more time. Here's what you should bring along:
- Government-issued identification, such as a driver's license or passport
- Proof of address, such as a utility or cellphone bill
- Funds to deposit into the account
Another common method of opening a checking account is to open one online. You can choose this option whether the bank has physical buildings or is an online-only bank.
Before you start to open the account online, have your personal information ready, such as your Social Security number or tax identification number, U.S. residential street address and birthdate.
While some banks require consumers to deposit a minimum amount of money, others have skipped that requirement and allow you to deposit any amount.
It is possible that when you attempt to open a checking account the bank could turn you down. Banks may not allow potentially risky customers to open an account.
The agency that tracks consumers' banking activity is called ChexSystems. If a bank charges you a fee, such as an overdraft fee, and you fail to pay it, the incident will be flagged in its records. If you have a serious number of incidents of unpaid fees, other banks may turn you down when you try to open an account.
Too many overdrafts or bounced checks also make you a higher risk to the bank. An overdraft occurs when you attempt to pay for an item or a bill and you do not have sufficient funds in the account.
Committing any type of fraud, such as opening an account in someone else's name, will draw a red flag and prevent you from opening another checking account.
A low credit score could also stop you from opening an account.
If you're turned down, then you may have to resort to alternative products. One alternative is a prepaid checking account. With a prepaid account, you can only spend what you have, and there is no concern about overdraft protection.
"The only requirement for someone to open an account is that their identity can be validated," says Wole Coaxum, a co-founder of Mobility Capital Finance, a New York-based banking platform.
Funds in your bank checking account are insured by the Federal Deposit Insurance Corp. and similarly protected in federal credit unions by the National Credit Union Administration. Individuals are insured for their deposit accounts – checking, savings, money market and CDs – up to a combined total of $250,000. This takes care of protecting your money against a bank failure, but what about other kinds of protection?
If your debit card is lost or stolen, you should call your bank or credit union immediately and report the incident. This will help you avoid being liable for any unauthorized charges made by a thief.
Most banks will cancel your previous debit card and send you another one with a new number. Log into your account frequently after the theft or loss occurs and monitor it to see if there are any transactions you don't recognize and inform your bank as soon as possible.
The Fair Credit Billing Act and the Electronic Fund Transfer Act protect consumers against fraudulent charges on a debit card within parameters. If you contact your bank within two business days and the fraudulent charges have already occured, your maximum liability is $50. Within 60 days after the bank mails your statement, the maximum liability is $500. If you wait more than 60 days after you receive the next statement, you are responsible for the entire amount of unauthorized charges.
One major concern for consumers is if your account or debit card number is stolen by hackers.
These days, checking accounts are a fairly safe bet when it comes to protecting your deposits from technical attacks by cybercriminals, says Nathan Wenzler, senior director of cybersecurity at Moss Adams, a Seattle-based accounting, consulting and wealth management firm.
"What we commonly see in movies where a hacker breaks in and stealthily transfers all of the money a bank holds into an offshore account isn't very realistic, as most banks are heavily regulated and have put in fairly strong technical controls," he says. "Most people can rest assured that their money is safe from a direct hacking assault launched from the outside."
The concern lies with many forms of online attacks that are successful at siphoning money from individual checking accounts. These kinds of attacks can range from identity theft that allows a hacker to pretend to be the legitimate owner of your account to the use of phishing emails to gain access to your system and then your banking credentials to steal the funds right from your accounts.
Unauthorized use of your debit card is also becoming common, says Chris Morales, head of security analytics at Vectra, a San Jose, California-based provider of automated threat management solutions.
"I worry even more about credit card skimmers at the gas pump," he says. "Yes, I check every single gas pump before I ever stick a card in the slot. That is the easiest way for someone to grab a credit card or debit card details. This is information a thief would then use to make online purchases, which in the case of a debit card would withdraw money directly from a bank account."
Criminals can also gain access to your checking account through your mobile phone, says Joseph Carson, chief security scientist at Thycotic, a Washington, D.C.-based provider of privileged account management solutions.
"Storing money in a checking account is completely OK, but the methods on which you make transactions is what increases the risks, such as mobile and internet banking," he says. "If cybercriminals obtain access to your checking account as a result of poorly secured mobile phones, websites or via phishing scams, you could quickly have your account emptied and owe money to the bank. It is much safer to use a credit card to make online purchases … (which) limits direct access to your money."
While everyone has different needs, budgets and preferences, keeping a checking balance that can cover all of your routine bills and expenses should be sufficient. If you find that you have a large amount of money left over each month, consider moving the money to your savings account so that your money can earn a small amount of interest.
"Keep just enough money for transactions," says Ma. "Put money for an emergency in a savings or money market account. The money can be transferred or used when you need it."
You should keep extra money or a buffer to take care of minor unforeseen expenses, says Creighton University's Johnson.
"Don't carry too high of a checking account balance, because you are forgoing interest that could be earned on the excess balance," he says. "Even if your checking account pays interest, the interest rate that it pays is not as high as some alternatives that could be used."
Checking accounts can have many fees. Always shop around and look for a checking account that has no or lower fees.
- Maintenance fees. Some banks charge a maintenance fee each month for keeping your account open. These fees typically range from $5 to $20. Common ways to skip this fee are to link a direct deposit such as your paycheck to your checking account or maintain a minimum balance.
- Checks. Though banks generally do not charge you a fee for writing a check, you will have to pay to order physical checks. Ordering through your bank may cost about $20 per 100 checks. However, you also can get checks elsewhere, such as retailers, for about half as much.
- Overdraft fees. An overdraft fee occurs when you attempt to pay for an item or a bill and you do not have sufficient funds in the account. If the bank allows the transaction to go through, it usually will charge about $30 to $38 per overdraft, so multiple overdrafts can become quite costly. When it comes to using your debit card, banks normally will let you opt in or opt out of overdraft service. If you opt out, you won't be charged fees, but your transaction won't go through if you don't have the funds to cover a purchase or withdrawal.
Another option is overdraft protection that links your main checking account with another account – another checking or maybe a savings account – from which the bank will transfer funds in order to cover your transaction. You will also pay for this service, but it's usually less than half of an overdraft fee.
- ATM fees. Most banks want you to use their ATMs or one from their network when you need to withdraw cash. If you use another network, you are likely to incur a fee of $3 or $5. Some banks either do not charge this fee or will reimburse you for the fee within certain guidelines.
Many banks now offer checking accounts without any fees, especially banks that are only online and do not have physical branches.
Banks and credit unions operate in very similar ways. Some consumers prefer to have their checking and savings account at a large national bank because they want access to their ATM and branch network.
Other people prefer to open an account at a credit union if their employer or an organization they belong to is affiliated with one.
Here are some features that favor each kind of institution:
- Offer investment and wealth management products in addition to banking products
- Usually have more branches
- May offer more extensive ATM network
- Provide more robust online features and apps
- Often offer higher interest rates for savings
- Often offer lower rates on loans
- Usually charge fewer fees
Though an individual credit union may have fewer branches or ATMs than a national or regional bank, some credit unions have formed branch and ATM networks that rival or surpass those of banks.
Whether you open an account at a bank or a credit union may depend on how you conduct your banking, how often you go to a physical branch and if you are seeking a loan from the financial institution in the future.
While traditional banks and online banks operate in the same fashion, here are some key differences:
Traditional bank: You can meet with bankers face-to-face when seeking guidance or asking questions.
Online bank: You will likely have to talk to customer service on the phone or through an online portal.
Traditional bank: You can deposit or withdraw money from a teller and also receive a cashier's check.
Online bank: At some online banks, you can't directly deposit cash. You have to get a cashier's check in the mail.
Online bank: Interest rates on deposit accounts may be higher and fees lower or nonexistent because online banks do not have to allocate money to construct and maintain buildings or hire employees to staff them.
Since the banking market is highly competitive, you should shop around for the best rates, lowest fees and most convenience. You can have a checking or savings account at more than one bank.
Overdrafts can get expensive really fast. An overdraft occurs when your bank allows a transaction – a withdrawal or a payment – to go through your checking account even though you don't have enough funds to cover it. Depending on the kind of transaction and the bank, you may have to give permission for the bank to overdraft your account, as opposed to just declining the transaction.
The average overdraft fee is about $32 to $34, with the highest fees at around $38. Some banks will charge overdraft fees up to seven times in a day, so you could be hit with more than $200 in fees on one day.
You can also opt for overdraft protection, in which the bank transfers funds from another of your accounts to cover your shortfall. There is also a fee for overdraft protection, but it's normally about $12 for each day it happens.
A step-by-step guide for closing your checking account:
- Open a new account. Assuming you still have money in the account you're closing, it will be easier if you have a place to transfer or deposit those funds already in place.
- Be sure no transactions are still pending. You don't want a payment or deposit unable to be completed because the account is closed when they finally clear.
- Change your account information for auto-pay and direct deposit. If you've set up automatic bill payments or your paycheck is directly deposited, make sure those businesses or your employer have the up-to-date account.
- Inform your bank you are closing the account and get written confirmation. If your checking account is with a traditional bank, it's best to do this in person at a branch and receive documentation. If your checking account is with an online bank, be certain you get digital confirmation of the account's closing.
Account number. On your checks, this is located at the bottom and is the second group of numbers, next to the routing number. You can also find it when you log into your account online.
ACH. Automated Clearing House, an electronic network for fund transfers such as bill payments and payroll direct deposit.
APY. The annual percentage yield is how interest is calculated, whether it is for a checking or savings account or for debt like a credit card. APY takes into account how interest compounds, such as monthly.
Autopay. This is a common banking feature that allows you to schedule an automatic monthly payment from your account. This helps consumers pay their bills on time and avoid late fees.
Check clearing. The process of the funds in a check becoming available for the payee to use. When the funds are fully available, the check is said to have "cleared."
Credit union. A nonprofit money cooperative that functions much like a bank. Members can borrow from pooled deposits at generally low interest rates. Savings accounts at credit unions typically accrue more interest than at banks.
Direct deposit. When the funds in a check are routed directly to your account without you having to endorse a paper check. Direct deposit is commonly used with employee paychecks.
Funds availability. The amount of money in an account that the account holder can use. When the account balance is higher than the funds available, it often reflects that the funds in a check deposited to the account have not yet cleared.
Remote deposit capture. A method of depositing endorsed checks into an account by submitting pictures of them through a bank's mobile app.
Routing number. Every bank has a routing number, a nine-digit code. You will need this number along with your account number for a direct deposit to be made into a checking account. On your checks, it is the first set of numbers located on the bottom left side and also can be found online.