What is a Checking Account?: A Quick 101 Guide
A checking account is a deposit account offered by financial institutions to make frequent transactions, typically including the deposit, transfer, and withdrawal of account funds.
Features
Depending on the financial institution, checking accounts can have various features.
Moreover, you might find different tiers of checking accounts where the more premium options offer benefits and perks such as waived service fees or dedicated customer service.
Checks
Legally, a check is a document that guarantees payment of a specific amount of money drawn from a bank or other financial institution.
With checks, you don't have to make a financial exchange in cash.
When you open a checking account, the bank usually provides an initial order of checkbooks for free. Additional checkbooks can be ordered (fees may apply).
Note: Some "checking" accounts don't provide check-writing capabilities because the arrangements were designed for people with histories of writing bad checks.
Debit card
A debit card is the most common feature of a checking account, which allows customers to make transactions in various ways without using cash or checks.
These transactions include, but are not limited to:
- Accessing ATMs
- Making purchases via card payment terminals
- Paying for purchases online
Electronic transfers and payments
Checking accounts allows you to transfer and receive funds electronically -- often considered one of the fastest (and most guaranteed) payment methods.
Most importantly, you can receive direct deposit, which is notably used by:
- Your employer to pay wages
- The government issues benefits
- The IRS to issue tax refunds
ATM access
With a checking account and a debit card, you can use ATMs to deposit cash, checks, and money orders.
You may also withdraw cash.
It is important to note that your checking account may charge fees for using an ATM not within your bank's network. Additionally, the owner of the out-of-network ATM may impose a separate surcharge.
For example, you use another bank's ATM to make a cash withdrawal. Your bank can charge a fee, and the other bank can charge another fee for this single ATM transaction.
Earn interest
Checking accounts may come with the ability to earn interest on the deposit balance, but the interest rate is usually less than what you'd get from a savings account.
Generally, the highest checking rates are available from online banks, community banks, and credit unions.
Monthly Fee
The monthly maintenance fee is simply the cost of keeping the checking account open.
Typically, the bank will waive this fee if certain conditions are met.
For example, these requirements may include any combination of:
- Maintaining a minimum balance during the month
- Posting a number and amount of monthly direct deposits
- Performing a certain number of transactions (e.g., debit card purchases, online bill payments, etc.)
- Have another account from the bank (e.g., savings account, mortgage, IRA, etc.)
- Be under or over a certain age (e.g., under 21 or over 55)
Monthly fees are charged at the end of every statement cycle.
Overdraft
An overdraft results from a transaction that causes your checking account balance to fall below $0.
You did not have enough money in the account when a transaction was being processed. But, the bank may have paid to ensure that the transaction was completed -- meaning you'll have a negative account balance that represents what you owe the bank.
Not all transactions can result in an overdraft.
When you open a checking account, you may opt for overdraft coverage, covering everyday purchases or ATM transactions made with your debit card. If you opt out, the transaction will be denied if it leads to an overdraft.
These rules do not apply to other transactions -- overdrafts can still occur even if you opt out of the abovementioned coverage.
The other transactions include:
- Recurring bill payments
- Written checks
Banks charge overdraft fees, which can be very expensive because the charge applies to each transaction that triggers an overdraft.
Generally, if you deposit funds to correct the negative balance by the end of the day, the bank will not charge overdraft fees.
Who Can Open a Checking Account?
Anyone 18 or older can sign up for a checking account.
Other critical pieces of information that a financial institution usually requires are:
- Social Security number
- Mailing address
- Government-issued photo identification
ChexSystems
ChexSystems is a consumer reporting agency that keeps records of negative remarks regarding bank accounts.
Past instances of frequent overdrafts, unpaid negative balances, writing bad checks, and other infractions are logged in your ChexSystems report.
U.S. financial institutions will likely pull your ChexSystems report for review when you apply for a checking account. You may be denied a checking account if the report shows you've abused or used a previous bank account irresponsibly.
You can obtain one free copy of your ChexSystems report per year.
How to Choose a Checking Account
The best checking account for you should be low-cost and convenient, and it should offer all the necessary features that allow you to conduct and manage your everyday finances easily.
To start, these are the main features to look for:
No monthly fees
Ideally, you want to avoid paying a monthly maintenance fee to have a checking account.
If the account does have a monthly fee, make sure that you can meet the fee-waiver requirements monthly.
Free checking accounts have no monthly fees and are usually found at online banks, community banks, and credit unions.
Branch and ATM access
How often do you visit a branch or ATM? Do you want the perk of being able to walk into a unit with the assistance of a personal banker?
If you want widespread access to branches and ATMs, you'd want to seek a bank that has locations near your home, work, school, and other places that you visit frequently.
Some banks and credit unions are partnered with ATM networks that increase the availability of ATMs so that you can avoid out-of-network ATM fees.
Online and mobile banking
Accessing and managing your checking account from home or a mobile device means you can view your account and make transactions quickly.
So, you might prefer a checking account from a bank that offers convenient features through online or mobile banking.
Examples of great features include:
- Account alerts
- Mobile check deposits
- Debit card lock/unlock
- Online bill pay
- Person-to-person payments
With these features, many customers may not need to visit a bank's branch or ATMs.
