What is a Checking Account?

writing-a-check.jpg
••• Peter Cade/The Image Bank/Getty Images

A checking account is a bank account that allows easy access to your money. Also called a transactional account, it’s the account that you will use to pay your bills and make most of your financial transactions. If you have a checking account you can access your money by writing a check, setting up an automatic transfer or using your debit card. These transactions are debits to your account, while a credit is a deposit. Money that you put in a checking account usually won’t stay there for long, since it’s where your everyday spending, bills, and other debits occur.

What Are the Differences Between a Checking and Savings Account?

Most checking accounts do not have rules about the number of transactions you can complete each month, while a savings account may limit the number of withdrawals you can make from an ATM or in person. There are also limits on the amount of transfers you are allowed from savings to checking accounts.

Generally, you can’t make payments directly from a savings account, due to a federal law called Regulation D that limits certain withdrawals.

It’s fairly easy to spend money in your checking account via taking money out of an ATM, writing a check, using your debit card, or paying for something electronically. So If you’re looking for an account for your spending money, a checking account is your best bet.

Choosing the Right Checking Account

You will find that most banks offer many options for checking accounts. You should carefully consider the features you need when choosing your checking account.

Pay particular attention to the minimum balance requirements, and choose be sure you can maintain it. You do not want to end up with a minimum balance that you cannot maintain and end up owing the bank money each month.

Some accounts also limit the number of checks or debit transactions you can have a month. Others limit the number of bill pay transactions. You should be aware of these limits and be sure they work for your spending style. If the numbers seem too restrictive, consider moving your account elsewhere.

Additionally, you should consider the monthly service fee and overdraft fees for each of the accounts. Credit unions often offer lower fees. Also keep in mind that many banks have monthly service fees if you have automatic deposit or meet a minimum number of monthly transactions. However, fee-free checking accounts do exist.

Opening a Checking Account

Once you have found a checking account that meets your needs, the next step is to open the account. When you go to the bank to open your new checking account, you will need to provide your social security number and a valid form of identification.

Most banks will not open a checking account for a minor, so it you are younger than 18 years old, you will need a cosigner on the account. When you open up a checking account the bank will also run a quick background credit check. If you have been reported to ChexSystems or a similar company you will not be allowed to open an account until you clear that up, as the bank won’t risk losing money on you. (Can’t open a checking account? You have other options.)

Using a Checking Account

When you first open your checking account you will need to keep a running balance in order to track the amount that you have in your account. This will prevent you from overdrawing your account. Remember, the balance you receive at the ATM or see online may not be the most recent, because not everything will have cleared your account yet. This is why it is essential to keep track of your transactions on your own. If you’re not a pen-and-paper kind of person, online budgeting and money software can help you do this.

Additionally, it is very important to balance your account each month, as this will help you to catch any errors that you or the bank have made such as deposits to the wrong account or unauthorized transactions.

Keep in mind that sometimes, your funds may not be immediately available, it is important to understand your bank's policy about making your deposits available.

Understand Your Overdraft Options

You should also find out about overdraft protection that your bank may offer. Some banks or credit unions will allow you to link another account to the funds and will transfer money over to cover you when you go into the negative. Other banks will link a line of credit to your checking account and will transfer money into your account to cover you. Others will allow you to overdraw up to a certain limit and then begin returning checks.

If you are prone to overdrafting your accounts, you should educate yourself on the best overdraft protection offered by your bank, as well as the fees that go along with it.

Protecting Your Money

A checking account is insured by the FDIC for up to $250,000. However, if you have that much money, you are likely better off to put the majority into a savings account or another type of investment tool.

Your checking account should really only contain the funds that you need for your daily transactions during the month. Though some banks do offer interest-bearing checking accounts, the rates are usually lower than a savings account.  Also, if your checkbook or debit card is stolen, it is important to report it immediately. The bank can put stop payments on your account and prevent you from losing a large amount of money.

Updated by Rachel Morgan Cautero.