Personal Banking 101: Checking Accounts

One of the most basic of bank accounts is the checking account. A checking account is considered a deposit account because you put money into the bank, and the bank holds it for you. In most cases, you can access the money in your checking account by using a debit card or ATM, withdrawing money at the teller window, or writing a check. Options to use ACH transfers online and over the phone are also usually available.

It is important to understand the terms associated with your bank account, and make sure that you choose an account that fits your needs.

Types of Checking Accounts

First of all, you need to decide whether you need a single checking account or a joint checking account. If you have a single checking account, you are the only person authorized to use it. A joint checking account is one that two or more people can access. Couples who combine finances usually choose a joint account, and minors who open accounts usually have joint checking accounts with their parents. There are other ways for checking accounts to be accessed, but most households will usually need a single account or a joint checking account.

Here are three of the most popular types of checking accounts:

1. Free Checking: This type of account is designed to cater to the greatest number of people. Until recently, most banks have not charged monthly service charges associated with your balance (as long as you remain above $0) with free checking. Usually, there are no limits on the number of debit card transactions you can make. However, some banks appear to be moving away from this generous type of checking account. Some "free' checking accounts now come with activity, minimum balance, and other requirements to avoid service charges.
2. Interest Bearing Checking: Some banks offer interest bearing checking accounts. You earn a small yield on the money in your account. There are usually no restrictions on the number of transactions that you make. However, you may be required to maintain a substantial minimum balance if you want to avoid a fee that destroys the value of your yield.
3. Money Market Checking: If you are looking for a higher return on your checking account, you can try a money market checking account. In reality, a money market account of this type is actually more like a savings account with some checking account privileges. Sometimes these accounts are referred to as money market deposit accounts. The interest paid to you on this type of account is based on market rates, and is often higher than what you would earn on a regular interest bearing checking account – and higher interest than you would get with a traditional savings account. However, there are more restrictions on a money market checking account. You are limited as to withdrawals you are allowed (no more than six checks can be written a month from these accounts, per Fed regulations), and you generally have to maintain a substantial minimum balance.

You might also find that many banks offer special checking accounts aimed at specific demographic groups, like students or seniors. You might get special check writing privileges, or you might receive better rates on loans, as well as be eligible for special promotions and discounts. Other types of checking accounts that you might encounter include:

• Lifeline Checking: Some states require that banks offer these very basic accounts meant for those with low incomes. Monthly fees are usually no more than a few dollars a month (and often $0 a month) and usually do not require a minimum balance. Check writing might be limited. Terms and fees of lifeline checking accounts are set by the states that require them, rather than the banks themselves.
• Express Checking: This type of checking account is aimed at people who rarely go into the bank. Express checking is designed to encourage account holders to do their banking by phone, ATM or computer. These accounts are very similar to free checking accounts, but there might be a charge if you visit the bank teller more than two or three times a month.

Rewards and Bonuses

Many banks offer accounts now that come with rewards. In order to compete with credit card rewards programs, you might be able to get a rewards debit card. When you use your debit card, you build up reward points – or even cash back. However, many debit rewards programs come with annual fees.

There are some high-yield reward checking accounts that reward you for certain behaviors. If you meet certain requirements each month, such as using direct deposit, making a certain number of debit card transactions (sometimes with a requirement that they be signature rather than PIN), or receiving statements online, then you are rewarded by receiving a higher yield.

In order to entice you to deposit your money in a bank, many offer cash bonuses. These bonuses can range from $25 to $300. While it can be tempting to sign up for the checking account with the highest bonus, it is important to be careful. The higher the bonus, the more likely you are to need to complete a number of steps in order qualify for the bonus. Some of the things you might have to do in order to get your bonus include:

• Maintain a minimum balance for a set period of time.
• Make a certain number of debit transactions with a certain time period. (You might have to make sure you sign for the purchase, instead of entering your PIN.)
• Set up a direct deposit.
• Schedule automatic bill pay.
• Open another account at the bank, and possibly link the two.

Requirements for receiving your bonus vary by financial institution, and you should make sure that you understand exactly what is expected of you if you want to receive the cash bonus. Realize, too, that the bonus is likely to be added to your account. If it isn’t added to your bank account, you might be issued a debit card with the bonus on it. Actually handing you a check for the amount of your bonus is not likely.

Fees, Fees, Fees

Even if you have a free checking account, you need to be aware of fees. All checking accounts come with fees for overdrawing your account. Additionally, you need to be aware of fees charged when you elect to receive paper statements, as well as fees that might be associated with using bill pay services.

The fees of biggest concern, though, are usually overdraft fees. These fees can be anywhere from $15 to more than $45, depending on your bank and the checking account terms. One of the best things you can do as a savvy checking account owner is to understand the main differences between overdraft protection and standard overdraft practices:

• Overdraft Protection: This is usually a line of credit. Your credit history might be checked before you are allowed overdraft protection. When you have overdraft protection, transactions that put you beyond the amount of money in your checking account clear. However, you will be charged interest on the amount that you are negative until you are back in the black. Many banks will put a limit on the amount that you can go into the red. Additionally, some banks charge an annual fee for checking accounts with overdraft protection.
• Standard Overdraft Practices: Prior to the summer of 2010, banks usually offered this type of overdraft protection automatically. Now, though, you have to opt in to the service if you want it. If you spend more than you have in your account, the bank will allow the transaction to go through – but you will have to pay a fee of up to $45 or more. And, after a certain number of transactions, your debit card will be declined. If you decide not to allow standard overdraft practices, your debit card will be denied if you try to use it and you have insufficient funds. This does not apply, however, to ACH bill payments and in some other circumstances.

Bottom Line

Checking accounts can be quite useful, and they provide you with a relatively simple and convenient way to manage your money. Consider what different banks have to offer, and then choose the checking account that will best fit your needs.