While you can get by without one, a checking account is a safe and efficient way to store your paycheck and access it when you need cash or need to pay bills.
Checking accounts have been around for at least 500 years; the first printed checks, which contained serial numbers that cashiers could “check” against account-holder’s identities, arrived in Britain in the mid-1700s. The purpose of checking accounts is the same now as it was then: to safeguard more money than you need to carry on hand, while still allowing you to access and use it easily.
In modern times, you can deposit money into your checking account at the bank, at one of your bank’s ATMs, or, in some cases, just by snapping a photo of a check with your phone using your bank’s mobile app. To access the money in your checking account, you can withdraw cash at the bank, use a debit card to take money out of an ATM or make purchases directly from your checking account, or, of course, write someone an actual check from your checkbook.
That said, not all checking accounts are created equal. Financial institutions differ in terms, restrictions, fees, and so on. Here’s what you need to know.
Checking Accounts vs. Savings Accounts
Checking accounts differ from savings accounts because they’re structured to provide more frequent access to money. Savings accounts are intended to allow you to accumulate cash and earn interest on it, but not to withdraw it often.
The Federal Reserve Board’s Regulation D places a six-transaction limit on the number of “convenient” transfers or withdrawals a savings account-holder can make per monthly statement cycle, in order for an account to be classified as a savings account. Transfer money out of a savings account more often than that, and you might find yourself on the receiving end of a stern warning from your bank, and eventually, a closed account or the conversion of a savings account to a checking account. The purpose of Regulation D is to ensure that the bank has enough funds to cover depositors’ requests.
Checking accounts have built-in safeguards as well, in the form of fees or minimum balance requirements. Generally speaking, checking accounts — which require a bit more work from a bank — tend to carry higher fees than savings accounts, and also tend to offer far less interest, if any. Remember that a checking account is geared toward convenience and short-term cash flow, not accumulating savings.
Both types of deposit accounts are insured by the FDIC (Federal Deposit Insurance Corporation) for up to $250,000 per account (or, in the case of joint accounts, per co-owner, provided each owner is a living person).
Checking Account Fees
Financial institutions vary in the terms they offer prospective checking account holders, and it pays to read the fine print before signing up. It’s possible, for example, to get a “free” checking account that doesn’t charge a monthly fee, but that won’t usually save you from paying out-of-network ATM fees.
In general, online banks and credit unions are more likely to offer free checking accounts. If you opt for one, be sure to check on the size of the institution’s ATM network if you think you’re likely to withdraw money frequently, or see whether they’ll reimburse you for any out-of-network ATM fees you might have to pay.
A few checking account fees and restrictions to look out for include:
- Monthly maintenance fee
- Annual maintenance fee
- Minimum balance fee
- Minimum deposit to open fee
- Nonsufficient fund (NSF) fee
- Paper statement fee
- Online bill pay fee
- Overdraft fee
- Out-of-network ATM fee
There are also some less common circumstances that could lead to unexpected fees. For example, some banks charge to replace lost debit cards, to close your account within 90 days of opening it, or to buy something in a foreign country with your debit card.
Fees can also vary depending on the amount of money in the account. For example, some banks will waive monthly and/or paper statement fees if the daily balance in the account exceeds a certain dollar amount.
Look out for loopholes that could hurt or help you — for instance, many online checking accounts are fee-free so long as you conduct all of your banking online. Go through a teller, and you could wind up getting socked with fees.
Picking the best checking account for you can be tricky, but the bottom line is that you need to read the fine print and choose an account that best serves your needs, not your financial resolutions. In other words, if you know you prefer withdrawing cash from an ATM, or getting paper statements, or going through a teller, don’t try to convince yourself you’ll change your behavior. Look for the fees associated with your preferences, and choose the account that allows you to bank the way you want to at the lowest cost.