How Checking Accounts Work

Banking and Paying With a Checking Account

A check
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A checking account is an essential part of everyday banking. It is where you keep cash that you’re ready to spend or deposit money that you receive from an employer.

Banks and credit unions provide checking accounts, and there are several different kinds that consumers can choose from. There are also alternatives for those who do not qualify for traditional accounts.

Checking Account Basics

A checking account is a transactional account, meaning money goes in and out regularly. These accounts are designed to make it easy to receive and spend your money.

Checking accounts keep your money liquid, meaning it's easily available when you need it. Other accounts, like savings accounts and CDs, limit your access to cash.

Generally, you will deposit your pay in a checking account or have your employer do so via direct deposit. Institutions like the Internal Revenue Service (IRS) can also use direct deposit to issue a tax refund or stimulus payment directly to your bank account.

To set up direct deposit, you will need to provide the account and routing numbers associated with your account. You can usually find these numbers in your account information, either online or in any paperwork you receive. They can also be found at the bottom of your paper checks.

Checking accounts generally do not make money for you. Most offer either no or very low interest. You should only keep money in your checking account that you intend to use in the near future.

If you do not need the funds available in the near future, you should move them into an account designed for longer-term goals, such as a savings account, retirement account, or investment account.

Costs of Using a Checking Account

Once the money is in your account, you can use it to pay for bills and daily expenses. There is no fee to use the money in your account. However, many checking accounts will charge monthly fees to keep your account open.

Online checking accounts, or accounts offered through military banks, are more likely to have no monthly fees. However, you may be able to have fees waived at other banks by meeting certain criteria such as:

  • Maintaining a minimum balance
  • Making a certain number of transactions per month
  • Setting up direct deposit

Checking accounts will also charge overdraft fees. These happen when you try to spend more money than you have available in your account. The bank or credit union allows the charge to go through but charges you an additional fee in exchange.

You can avoid overdraft fees by paying attention to how much money you have available and sticking to a monthly budget. You can also set up overdraft protection, which will automatically pull money from a linked account to cover the charge and avoid an overdraft fee. Most checking accounts offer overdraft protection, though they may charge an additional fee to set it up. 

Ways to Spend Money From a Checking Account

When you want to spend money from your checking account, you have several options.

  • Cash: You can always withdraw cash from your checking account for spending. If you are a customer of a brick-and-mortar bank, you can get cash from a bank teller. You can also use any available ATM to withdraw cash, though if you are not a member of the bank that ATM belongs to, you may have to pay a fee to use it.

Some banks will refund ATM fees, especially online-only banks or those without ATMs of their own.

  • Check: You can write a check, which the recipient will then deposit at their own bank to transfer the money from your account to theirs.
  • Debit card: You can typically make purchases with your debit card. Unlike a credit card, a debit card pays with money directly from your account, rather than giving you a loan for the month. The money comes out of your checking account electronically, and you don’t have to deal with any change.
  • Online pay: Most banks and credit unions allow online bill payment with every checking account. Instead of writing checks and dropping them in the mail, you can arrange payments online. You can even automate payments so they go out automatically.
  • Electronic transfer: Instead of having your bank initiate payments, you can provide your routing and account numbers to whoever you need to pay. They can then deduct funds from your account as a one-time transaction or through recurring payments.

Only provide your routing and account numbers to institutions or individuals that you know and trust. Giving these numbers will provide access to all the funds in your account.

  • Cash transfer apps: If you use cash transfer apps like Venmo or PayPal, you can link them directly to your checking account and have them pay directly from the funds you have available.

Checking Account Safety

The cash in your checking account is ready to spend, but it is still safe. If your bank or credit union is federally insured, your money is protected and can only be spent by you. If the bank loses your money or fails, you won't lose any insured funds, although there could be some delays in accessing them.

If you keep cash around your home instead of leaving it in a checking account, you risk losing that money. For example, you could be robbed or misplace your money. You might lose it all if it is destroyed in a flood or a fire. Checking accounts put all that risk on the bank and guarantee that your money is protected.

Types of Checking Accounts

Checking accounts come in various forms. Your bank might offer several options with different features, such as a free book of checks, online bill payment, rewards, or certain bonuses. Most banks provide a debit card at no charge and will replace it if it is lost or stolen.

Checking accounts can be personal accounts, owned by an individual or owned jointly by several individuals. Businesses, governments, nonprofits, and other entities can also open checking accounts.

Some specialty types of checking accounts include:

  • Online-only checking accounts. These are generally found through online banks, rather than brick-and-mortar institutions. However, some large national bank chains offer online-only accounts to customers who don't need in-person banking. Many online-only checking accounts have no monthly fees and some may offer cash back on purchases as an incentive for signing up.
  • High-yield checking accounts. These accounts offer higher interest than basic checking accounts, though still not as high as you would find with a certificate of deposit or a money market account. They may charge monthly maintenance fees or have a minimum balance requirement in exchange for earning interest.
  • Reward checking accounts. Reward checking accounts offer certain benefits, such as earning higher interest on the money in your account or receiving preferred rates on other services like new loans. However, you may have to qualify for these accounts through actions like opening a credit card or investment accounts with the bank.

Where to Open a Checking Account

If you are ready to open your first checking account, there are many factors to consider.

  • Accessibility. You want a bank that is easy to work with and that has customer support staff available whenever you need it. Online banks may be easier to set up accounts with initially, but you won't have the option to visit an in-person branch in the future if you need to.

If you're tech-savvy and you rarely need help from a teller, an online checking account can help you earn more while keeping your cash liquid.

  • Cost. Find a bank that keeps fees to a minimum. Online banks, or large banks with online-only accounts, are more likely to offer no-fee checking. Read the fine print on your account contract to find out how you can avoid monthly fees.
  • Size. Small local banks in your community are more likely to offer free checking accounts or introductory offers for locals, but you'll need to find a new bank if you move and may have to pay ATM fees when you travel.
  • Other services. Large, national chains are easily accessible and offer a variety of services beyond checking, such as mortgages or personal loans. However, they may have higher checking fees or more hoops to jump through to become a member.

When looking for a place to open a checking account, don't ignore credit unions. These institutions sometimes have lower fees on checking accounts, and they often have good rates on loans as well.

You may be eligible to join a credit union based on where you live or your job. And if the credit union is part of a shared branching network, you have thousands of branches available for use nationwide.

How to Open a Checking Account

To open a checking account, you will need to provide identifying information, including:

  • A government-issued ID with your picture
  • A second form of ID, such as a birth certificate
  • An identification number, such as your Social Security number or passport number

You will also need an initial deposit, usually between $25 and $100. Most banks will not open an account for a minor, so anyone under 18 years old will need a co-signer.

Whether you are banking online or in person, opening a checking account usually only takes a few minutes, and your funds will quickly be available for you to spend.

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