Opening bank accounts requires fundamental understanding of the different types of accounts available and how you can use them to manage, spend and save your money. For example, the way a checking account works is significantly different from the way a credit card account works because of the different sources of money available to you in these accounts. In addition, the funds from a credit card are a type of unsecured loan, while those from a checking account are your own money from deposits.
The primary difference between these accounts is that a checking account's funds are your own money from deposits and a credit card account's funds are money loaned to you from the card's bank. This means that purchases made with a credit card can incur interest since it's borrowed money.
How Checking Accounts Work
With a checking account, you make deposits into the account, either manually by visiting the bank or electronically by setting up direct deposits, with an employer, perhaps. The bank gives you a book of numbered checks imprinted with your account number and name. You can then write checks to pay bills or to make purchases and the bank debits the funds from your account. Also, some banks offer a checking and savings account combination with both accounts linked.
Generally, the balance you carry in a checking account will not earn much interest, or even no interest at all, while your money in a savings account will earn a higher rate of interest. If you write a check for an amount that is more than your account balance, you will overdraw your account, and usually the bank will levy a penalty fee. Policies vary, and some banks offer a certain number of no-penalty overdrafts. If you have a savings account linked to your checking account, you might use the savings account as backup funding to avoid overdrafts.
How Credit Card Accounts Work
A credit card provides you with an available line of credit to use for spending. This line of credit qualifies as an “unsecured” loan that is issued to you by the bank that issued the card; this means that the loan has no collateral or asset attached to it as a guarantee. Most credit cards come with a predetermined limit on spending. Typically, this will be smaller if you are just starting out and have little credit history. As you build your credit history, the credit card issuer will typically raise your credit limit. You receive a monthly statement of your credit card purchases. If you pay your balance in full each month, the bank will not levy an interest charge. If you carry part of the balance forward, the bank will charge you interest.
Using a checking account to make purchases involves spending money you already have and have deposited into your account. The only credit associated with a checking account might be an overdraft line of credit, offered by some banks – the bank will cover overdrafts and charge you a fee and interest. With a credit card, you are borrowing money to make purchases. The advantage is you get to buy now even though you don't have the cash readily available; the disadvantage is you will wind up paying more if you don't pay your balance off completely at the end of the billing cycle. Many banks offer free checking accounts to customers; however, credit card companies often charge annual fees for credit card accounts.
Debit and Credit Card Differences
With most checking accounts, the bank will also issue you a debit card that often looks identical to a credit card. It functions as an ATM card so you can withdraw cash from your checking or savings account. It can also be used like a credit card to make purchases. When you make payments with your debit card, your purchase is subtracted immediately from your checking account; in essence, you've paid with an electronic check that clears immediately. When you use a credit card to pay, the charge goes to your account, and you don't have to pay it right away. If you are already paying interest on a balance, you will pay interest on the new charges too in most cases.