Money – or the lack of it – is a critical part of life and the driving motivator behind many of our daily activities. You work hard to earn it, and you want it safely tucked away somewhere once you’ve received it. But you want to be able to get to it, too, when you need it. Enter the checking account.
A checking account is a type of bank account that holds your money for you at a financial institution. It keeps it safe and sound, and most banks offer a variety of means allowing you to access it at any time of the day or night. Checking accounts are sometimes called “transactional accounts" for this reason. There’s no limit to the number of times you can take money out or put money in. Some banks might charge you a little for this convenience, however.
How Does a Checking Account Work?
Let’s say you’ve just received your paycheck. Sure, you can cash the check at your employer’s bank and stuff all those bills in your purse or wallet – or you can deposit it into your checking account at your own bank so no one can mug you on your way home and steal it.
Checking accounts almost always come with debit cards so you can easily access that money after you deposit it. Debit cards work just like credit cards, except you’re not charging the money to pay it back to a lender later with interest. Charges you make with a debit card are subtracted from your checking account immediately when you swipe your card at a store or use it at an ATM to withdraw a little cash.
Read More: How Does a Debit Card Work?
You might also have a rent payment coming up, and an electric bill to pay. You can write a check on the account to the power company, or you can often pay by a direct debit online. Almost all major companies are set up to allow you to simply enter your checking account number and your bank’s routing number and click “pay” or “submit.” That’s it. You’re done. You can let the balance of your paychecks accumulate throughout each month, then write a check to your landlord, too.
Read More: Pros and Cons of Online Bill Pay
Many banks will even pay your regular bills for you if you sign up with their online bill payment systems.
Your Money Is Federally Insured
Not only do you not have to concern yourself with someone mugging you and stealing your cash, but your money can’t be lost if your bank folds, either. Checking account balances are insured by the federal government. The Federal Deposit Insurance Corporation guarantees that up to $250,000 of your money is protected in the event that something catastrophic should happen and your bank fails.
Read More: What Is the FDIC Insurance Limit?
Advantages a Checking Account
A checking account isn’t just about spending. It can receive money for you as well. You can set up direct deposit of your paychecks if your employer is willing to do that and skip that trip to your bank on payday. The money will land electronically in your account. You don’t have to do a thing.
You still won’t have to go to the bank even if your employer isn’t set up for direct deposit if your bank has a mobile app, and many do. Simply endorse your check by signing it on the back, then take a picture of both sides with your smartphone. Submit the image via the app.
Another advantage is that you can easily check on the status of your money – payments you’ve made, deposits that have arrived and your balance – simply by accessing your checking account online. Almost all banks provide online access. Log in for a complete list of transactions, usually going back months. There’s no need to keep a handwritten register like your grandparents did so you can track your spending and bill payments.
And you don’t have to worry about piling up a mountain of debt if you regularly use your debit card rather than a credit card. Remember, those charges are coming straight out of your account. Just be sure to keep track of them so you don’t end up overdrawing your account.
Disadvantages: Overdrawing Your Account
With all this ease, convenience and simplicity, what could possibly go wrong? Actually, a couple of negative things can happen if you’re not careful and responsible.
Let’s say that you’ve whittled your checking account balance down to $50 by being a little too swipe-happy with your debit card. Now a $100 bill payment also hits your account, maybe one you scheduled with the payee in advance or because you wrote a check. One of two things will happen now, and possibly both.
Your bank might not honor that $100 payment. It will effectively tell the payee, “Sorry. That money’s not there,” and decline to pay it. You can avoid this if your bank offers overdraft protection and if you also have a savings account or line of credit there. They’ll transfer the money from one of those accounts to cover your “whoops” so the payee will still get its money. Most banks charge an extra fee for this courtesy, however.
Otherwise, not only is a declined payment embarrassing, but it’s almost certainly going to cost you some of that $50 you still had left in your checking account. Your bank will hit you with an overdraft fee. Bankrate did a study in 2019 and found that the average fee for overdrawing your account was $33.36, and some banks will charge you a “returned check” fee on top of that, effectively making you pay for their inconvenience in having to deny the payment. That fee can run about the same amount.
If your bank didn’t honor that $100 payment, your $50 balance just dropped to $16 – the $50 less that $34-or-so slap on the wrist. And if it did honor the payment, now your balance is $84 in the hole – the $50 less the $34 less $100. And you can bet that your bank is going to want to collect on that money.
Another Disadvantage: Access to Cash
Another potential disadvantage with checking accounts is that some banks limit the amount of cash you can withdraw at an ATM via your debit card, either by the day or in one transaction. So technically, yes, you can get to your money at any time by visiting an ATM, but not too often and maybe not too much.
Some banks will also charge you a couple of dollars every time you hit an ATM that’s not located on their premises. Check on this with your local bank if you’re considering opening a checking account and you think you’ll probably be a heavy ATM-user. You won’t want to have to drive 20 or 30 minutes to get to your bank’s nearest branch whenever you need cash. Find out if using ATMs at other locations, such as your local grocery store, is free with the bank you’re thinking of choosing.
Fees and Costs of Keeping a Checking Account
Almost all banks will nip away a little at your checking account balance with other costs and fees as well. These charges aren’t limited to overdraft penalties.
On the bright side, you can almost certainly make unlimited transactions each month without paying a fee for this, provided you have sufficient money in your checking account to cover them all and you’re not doing all those transactions at an ATM. On the darker side, some banks charge a “monthly maintenance fee” for the privilege of keeping your money safe for you in that checking account. They’ll usually give you options for avoiding this, however, such as by maintaining a certain minimum balance in the account each month.
And if you ever want to write paper checks, those checks will cost you. You have to buy them – they’re typically not free. You might pay extra if your account sits idle for too long without any transactions, too.
A Bank-by-Bank Comparison
Those monthly maintenance fees can vary somewhat considerably from bank to bank. Online banks that operate exclusively on the internet tend to be kinder in this regard. For example, the Capital One 360 checking account has no monthly maintenance fee at all, whereas a brick-and-mortar-based TD Convenience checking account will hit you to the tune of $15 a month. Most banks charge from $10 to $12 a month, and the average is about $9.60.
The minimum balance you’ll have to maintain in your account in order to avoid this fee can vary significantly as well, but it’s always considerably more than that little $10 ding. Somewhere in the neighborhood of $1,500 is usually the magic number. Bank of America, Wells Fargo, Chase, Citibank, U.S. Bank and BB&T Bright Banking all require that you keep at least this much money in your checking account in exchange for letting you skip those pesky monthly maintenance fees. SunTrust Bank is much kinder – it only wants you to maintain a $500 balance, and TD Bank is even nicer. The minimum there is just $100.
But Your Money Might Earn You Money
It’s not all take and no give with every bank. Some – but by no means all – pay interest on the balances held in checking accounts. Unfortunately, this interest isn’t likely to fund your next vacation. The rates are typically negligible, less than you would receive if you put your money in a run-of-the-mill savings account instead.
Banks usually tag these accounts as “interest checking accounts,” and you might earn a somewhat higher rate of interest if you maintain a more significant average balance. Credit unions tend to pay better interest rates than banking institutions.
How to Get a Checking Account
Opening a checking account is pretty straightforward and simple, but you’ll want to do a little homework first. Compare banks on the basis of what’s most important to you before you settle on one of them to hold your money. Branch location might matter to you if you think you’ll have reason to visit in person periodically. And, of course, you’ll want to compare those minimum monthly balance numbers, potential overdraft fees and monthly maintenance fees.
Take yourself to your chosen bank’s brick-and-mortar location to open an account there. You’ll need ID, so you might want to call in advance to find out what type is acceptable. A driver’s license will always work, but you might need additional forms of ID as well, and you might be required to show proof of your address, such as with a utility bill in your name.
Fill out an application, show proof of who you are and give the bank your money. That’s it – you’ve gotten yourself a checking account. Just be sure to ask if you have to take an extra step to get a debit card, and find out how and where you can order checks.
The process for signing up for an online account is similar, and it's as easy as going to the appropriate website, but you’ll need a way to electronically transfer the funds to open it. And both online checking accounts and brick-and-mortar banks might require that you make a minimum initial deposit, but this could be as little as $25.
- Bankrate: What Is a Checking Account?
- Wells Fargo: Types of Bank Accounts
- Forbes: How Checking Accounts Work
- Dave Ramsey: What Is a Checking Account?
- MyBankTracker: Checking Account Fee Comparison at Top U.S. Banks
- Bankrate: Survey – Rising ATM and Overdraft Fees Leave Consumers Paying Much More Than They Did 20 Years Ago
- Advantages & Disadvantages of Debt Relief Programs
- Use a Debit Card As a Credit Card Without Your PIN Number
- The Average Interest Earned on a Savings Account
- Federal Deposit Insurance Corporation. "Weekly National Rates and Rate Caps - Weekly Update." Accessed May 6, 2020.
- Bankrate. "Checking fees rise to record highs in 2012." Accessed May 8, 2020.
- Bankrate. "Best Checking Accounts of May 2020." Accessed May 8, 2020.
- Federal Reserve Bank of New York. "How Effective Is Lifeline Banking in Assisting the ‘Unbanked’?," Pages 1-2. Accessed May 8, 2020.
- Bankrate. "Survey: Rising ATM and overdraft fees leave consumers paying much more than they did 20 years ago." Accessed May 8, 2020.
- Federal Deposit Insurance Corporation. "Deposit Insurance FAQs." Accessed May 8, 2020.
- National Credit Union Administration. "Bank to Credit Union Conversions." Accessed May 8, 2020.
- National Credit Union Administration. "Share Insurance Fund Overview." Accessed May 8, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.