Choosing where to keep your money is one of the most crucial aspects of money management. While you may keep your cash beneath the mattress, an FDIC-insured checking account is a far safer option. If you've never had a checking account before, you might be unsure how they function or if you really need one. However, there are several compelling reasons to use checking accounts to spend money and pay bills.
Checking Account Definition
A checking account is a type of bank account that lets you make deposits and withdrawals. People can use debit cards, write checks, or use an electronic fund transfer to swiftly spend money or pay bills from their checking accounts.
What A Checking Account Is Used For
Checking accounts are intended to serve as the hub of your financial life, allowing you to easily transfer funds in and out. Every pay cycle, you can deposit your paycheck into your checking account and use it to pay most of your bills.
Checking accounts, unlike savings accounts, are "transactional accounts," meaning they don't limit the number of transactions you can make or incur charges if you make too many.
It's better to keep your money in a checking account than to keep it at home or to carry significant sums of cash. Furthermore, insured banks and credit unions cover bank accounts up to a ceiling of $250,000 per account owner, so even if your bank fails, you'll get your money back. Look for banks or credit unions that are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
Different Types of Checking Accounts
Checking accounts aren't all the same, and depending on where you bank, you can choose from a variety of different sorts. Here's a quick rundown of the most common types of checking account and how they work.
1. Standard or Traditional Checking
A standard checking account also known as traditional checking account is a simple checking account that allows you to pay bills, write checks, and make debit card payments. To avoid paying a maintenance charge, this sort of account may have minimum balance restrictions, which means you must keep a particular balance daily or monthly. A minimum deposit may also be required to start a standard checking account.
Standard checking isn't usually accompanied by any added frills. The most common features include unrestricted check-writing, debit card access, and online and mobile banking access to manage your money.
2. Interest Checking
Interest checking accounts are similar to regular checking accounts except that you can earn interest on your balance. While interest checking accounts do not have a higher minimum amount to open, the rate of interest you earn can change based on the account balance you keep. Checking accounts at many credit unions have competitive interest rates.
The interest rate is usually lower than what you would get from a high-yield savings account or a certificate of deposit. These accounts, on the other hand, offer an easy way to increase your money while still having the ability to write checks and pay payments.
It's worth noting that some interest-bearing checking accounts are also known as high-yield checking accounts or rewards checking accounts, each of which has a different meaning.
3. Rewards Checking
Rewards checking accounts may or may not pay interest, but they do provide you the opportunity to collect rewards for your purchases. When you make purchases, pay bills, or schedule direct deposits into your account each month, you may receive rewards or a fixed percentage of cash back, similar to a rewards credit card.
Depending on the bank, you can usually redeem your rewards in a variety of ways. If you receive cash back on debit card transactions, for example, your cash rewards may be paid automatically into your checking or linked savings account. When you earn points, though, you may be able to exchange them for cash, gift cards, products, or travel.
4. Student and Teen Checking
Student checking accounts are for students who have never used a checking account before. To be eligible for these accounts, you must be between the ages of 13 and 24. Teen checking accounts, for example, are typically designed for children aged 13 to 17, whereas student checking accounts are typically designed for students aged 17 to 24.
The most significant benefit of student and teen checking accounts is that they frequently have low or no fees. If they do impose a monthly fee, they usually make it easy to avoid it by keeping a low minimum balance or setting up a monthly direct transfer.
5. Senior Checking
Senior checking accounts are created for senior banking customers, and they may have age restrictions comparable to student and teen checking accounts. To open one of these accounts, you might need to be 55 or older.
Free premium checks, personalized debit cards, fee exemptions, and higher interest rates on savings accounts are some of the benefits that senior checking accounts can provide. As an added benefit, some senior checking accounts pay interest or quarterly dividends.
6. Second Chance Checking
Second chance checking accounts are atypical bank accounts designed for persons who have previously struggled to manage a checking account. This type of account is usually suitable for people who have a negative checking history with ChexSystems on file. ChexSystems gathers data on banking transactions such as bounced checks and unpaid fees.
If you can't get authorized for a traditional bank account, these checking accounts can be a wonderful way to get back into the habit of using checks. They may charge greater fees than traditional checking accounts, but they can provide you with all of the same benefits, such as check writing and debit card access. If you can responsibly use a second chance account, you may be able to qualify for a normal account in the future.
7. Checkless Checking
Another type of alternative checking account is a checkless checking account. These accounts, as the name implies, do not allow you to write checks; all transactions must be completed using a debit card, mobile banking, or online.
Benefits Of Checking Accounts
Opening a checking account has numerous advantages. They are as follows:
Your money is safe in checking accounts. If you're carrying cash and your wallet is lost, you're out of luck. If you have money in a checking account and lose your wallet, all you lose is the cash you had on hand. To receive a new debit or credit card, all you have to do is call your bank. The FDIC or NCUA insures checking accounts for up to $250,000, ensuring that your money is safe even if your bank closes.
2. Ease of access
A checking account's main objective is to make it simple for you to access your funds. They use a combination of debit cards, cheques, and internet payment options to do this.
When you're out shopping, all you have to do is swipe your debit card or write a check from your checking account to pay for your purchases. There is no need for cash. You can use your card to withdraw cash from an ATM if you need to make a cash payment.
You can write a check against your account's balance for larger transactions, such as your monthly rent. This makes it easier to spend big amounts of money without needing to carry large amounts of cash.
Finally, you can make payments online via your bank's online bill payment system or by setting up automatic direct debits with the billing companies.
Many bank accounts have Zelle, a peer-to-peer transfer service that you can use from your phone to pay your pals. To make quick transfers, you can link your account to other services like Venmo.
Using software to automate your finances is a great way to make money management easier and less stressful. You don't have to worry about missing due dates or sending the wrong amount if you don't have to think about paying your bills. You will also save time as a result of this.
Automating your money management is simple with checking accounts. You can set up direct deposit to have your paychecks immediately deposited into your account rather of having to go to the bank every time you get paid. You can also set up automated payments to make sure that your credit card, utility, and other bills are paid on time.
4. Access to overdrafts
Overdrafts are a two-edged sword that occur when you withdraw more money from your account than you have in it and your balance falls below zero. The bank's overdraft fees, which are charged to cover your payment, might be costly. And they come at a time when your bank account is already depleted. Even yet, it's wonderful to have the option of spending a little more than you have in your account if you're in a pinch and really need to.
Overdraft protection, which transfers funds from your savings account or a line of credit when your checking account is overdrawn, is ideal.
Cons Of Checking Accounts
Checking accounts have some disadvantages that you should be aware of.
1. Poor interest rates
When compared to savings accounts, checking accounts often pay very low interest rates, which means your balance will not grow over time. Many checking accounts, in fact, do not pay any interest at all.
It is not always possible to have a free checking account. Some accounts incur monthly maintenance fees, which are deducted from your account by the bank. There are usually ways to avoid these costs, such as keeping a certain minimum balance or making a certain amount of debit transactions.
Other fees include those for ordering checks and fees for overdrafts. Examining the cost structure and ensuring that you will not be charged by your bank for allowing it to store your money is a crucial element of selecting the best checking account.
3. Difficult to switch accounts
People who open a checking account usually keep it for a long time. Switching accounts can be inconvenient, especially if you have direct deposit and many monthly bill payments set up.
If you do decide to switch, keep your old account open for a while after you make the switch to ensure you don't miss any bill payments or have a paycheck sent to the wrong account.
4. ATM limits
One of the benefits of having a checking account is the ease with which you can access your funds. Many banks, on the other hand, limit the amount of cash you can withdraw from an ATM at a time or in a single day. If you need to make a large cash transaction, you'll either have to go to the bank and withdraw the money in person or spread your withdrawals out over a few days.
Opening A New Checking Account
After you've done your research and decided on a bank for your checking account, you can begin the application process.
Filling out an application is the first step in the process. This usually entails supplying some personal information as well as government-issued identification, such as a driver's license.
If you're transferring money from an existing checking account to your new one, you'll also need the old account's routing number and account number. Your new bank will use this information to move funds from your old account to your new one. You might be able to make your initial deposit using a cheque or cash if you're opening an account in person.
Take some time to familiarize yourself with your new account once it is open and ready to use. Sign up for online banking and get the app for your bank. Set up any desired automation, such as bill payments and direct deposit.
Examining the last several statements you've gotten from your old bank is a smart way to start. Keep a watch out for bill payments deducted from the account, and make sure such automated payments are transferred to the new account. Don't forget to discuss changing your direct paycheck deposit with your employer. HR is frequently able to assist in making such modification.
After a few months of no automatic bill payments from your old account, you should be ready to shut it and focus only on your new checking account.