What Is A Checking Account And How Does It Work?

If your goal is to manage your money more efficiently, the day-to-day functionality of a checking account tends to be ideal. But before parking your funds here, it’s a good idea to learn the ins and outs of this banking method, and how it differs from other types of accounts.

What Is A Checking Account?

A checking account is a type of deposit account, which accepts funds you can then use to make purchases or pay bills. Checking accounts are available through online banks, brick-and-mortar banks and credit unions.

In general, checking accounts are designed for day-to-day use. While you could store your funds in this type of account for the long-term, leaving funds in a checking account could mean missing out on returns from other types of accounts.

How Does A Checking Account Work?

At the most basic level, a checking account works by allowing you to deposit money. When you have funds in the checking account, you can spend them directly out of the account.

Most checking accounts accept deposits in these forms:

• Direct deposit: This deposit consists exclusively of funds added directly to your account by an entity with your bank account information. For example, paychecks and government benefits are commonly deposited directly into bank accounts.
• Mobile check deposits: If your financial institution offers this feature, you can use your phone to deposit funds from a check into your checking account.
• ATM deposits: It’s possible to make cash deposits with the help of an ATM.
• Deposits made with a teller: If you prefer an in-person experience, you can often make deposits directly into your checking account with assistance from a bank teller.
• Wire transfers: Checking accounts typically accept incoming wire transfers.
• Once the funds are held in your checking account, you can use them to pay bills or make purchases. Take a look below at some of the methods of payment that are backed by the money in a checking account.
• Debit cards: Many checking accounts come with a debit card, which allows you to make purchases from retailers online or in person.
• Physical checks: Checking accounts tend to offer a book of paper checks, which you can use to make purchases.
• ATM cards: If you want to make cash withdrawals from an ATM, you can use a card associated with the account.
• Wire transfers: Most checking accounts use wire transfers to send large amounts of money to other bank accounts.
• P2P payments: Using a recipient’s email address or phone number, person-to-person (P2P) payments allow you to send money from your bank account directly to someone else. For example, Zelle is a popular P2P option.

Checking Account Features

Some people might be tempted to stick their funds under the mattress, figuratively speaking. But a checking account is a much safer place to keep money, and it offers a lot more benefits, too.

Here are some of the main benefits of a checking account:

• Insurance: Many checking accounts available through banks are FDIC-insured, which means that funds are protected for up to $250,000 per depositor. NCUA insurance offers the same level of protection for money in a checking account with a credit union.
• Interest-bearing options: Some checking accounts are interest-bearing, meaning the financial institution will pay you interest for storing your funds in the account. Any amount of interest-earning power offers a way to put your funds to work for you.
• Rewards and bonuses: Some checking accounts offer cash-back rewards and bonus opportunities to help you stretch your dollars.

Types Of Checking Accounts

Checking accounts come in many flavors, so to speak.

Traditional Checking Account

A traditional checking account, sometimes called a standard checking account, offers the basics. While you won’t find too many perks, you can count on having a place to deposit funds and pay your bills easily.

Interest-Bearing Checking Account

An interest-bearing checking account provides the opportunity to earn interest on your account balance. In many cases, interest-bearing checking accounts come with higher minimum balance requirements.

Depending on the financial institution, the amount of interest you can earn may be competitive. However, it’s often lower than the interest rate available through a high-yield savings account.

Joint Checking Account

A joint checking account offers a place for two or more people to manage their day-to-day finances. In many cases, joint checking accounts are designed with couples in mind.

Business Checking Account

A business checking account is designed for business owners, ranging from those who oversee small businesses to those who run larger companies. In general, a business checking account allows you to provide access to many employees while offering them varying levels of access.

Student Checking Account

Student checking accounts are available for college and high school students. Most of these accounts offer limited fees and low balance requirements for students who are just getting their financial life started.

Senior Checking Account

Some financial institutions offer checking accounts designed for senior citizens over a certain age. Depending on the bank, seniors might enjoy lower fees or discounts.

Second Chance Checking Account

Second chance checking accounts are designed for people with banking issues in their past. You can think of these bank accounts as accounts with training wheels. For example, if you’ve written too many checks that bounced, you might struggle to open a traditional account. But a second chance account, with some transaction limitations, might offer a way to rebuild your financial profile.

Checking Account Vs. Savings Account

Checking accounts and savings accounts are both places where you can deposit money. But the big difference between a checking and savings account is the features they offer. For example, checking accounts tend to come with debit cards to streamline transactions, while savings accounts usually provide fewer ways to make purchases.

Checking accounts are best-suited for storing funds that you plan to use in the immediate future. For example, you may store the funds you need to pay your bills over the next month or so.

In contrast, a savings account is designed for longer-term plans. Generally, you can find much higher interest rates available through savings accounts, which can help you grow your funds. But, as noted, savings accounts don’t make spending as convenient as a checking account. Without a debit card or book of checks tied to your savings account, this account usually isn’t the right place to pay your bills from.

Why Do You Need A Checking Account? 

If you want a streamlined account to help you pay your bills and make purchases, a checking account is likely the right fit. It’s much easier to manage your funds through a checking account than to operate solely with cash.

How To Choose A Checking Account

If you’ve decided it’s time to open up a checking account, you’ll quickly find numerous options. As you explore the possibilities, keep the following items in mind:

• Fees: Many checking accounts come with monthly maintenance fees, among other fees. Make sure you’re entirely comfortable with the fees before signing up for an account.
• Balance requirements: Some checking accounts carry a minimum balance requirement. Confirm the balance requirement is one that works for your finances.
• Accessibility: Some banks offer in-person services, while others are entirely online. Find a financial institution that offers a level of accessibility that suits your preferences.
• ATM network: If you plan on taking out cash regularly, a large network of fee-free ATMs is ideal.
• Interest: The ability to earn interest on your balance puts your funds to work for you.
• Insurance: Most financial institutions offer FDIC or NCUA insurance. It’s important, though, to double-check this detail to confirm your funds are protected.
• Overdraft protection: Some checking accounts charge a fee if you overdraw your account. However, other accounts offer overdraft protection by using a linked bank account of yours to cover your purchase and enable you to avoid the fee or the inconvenience of seeing your debit card declined.
• Perks: Consider picking a checking account offering perks that can help you stretch your dollars. For example, opting for an account with a cash-back debit card might add some breathing room to your budget.

FAQs: Checking Accounts

Have questions about checking accounts? Find the answers you’re looking for.

What is a checking account used for?

In short: A checking account is a place to deposit your money or have another entity, such as an employer, deposit money on your behalf. When adequate funds are in your account, you can make purchases with a debit card or physical check. Most often, this type of account is used for day-to-day spending and paying bills.

Is a debit card a checking account?

Many checking accounts offer debit cards as a feature. A debit card in itself isn’t a checking account, though. Debit cards simply allow you to access funds in an account.

How many checking accounts do I need?

While there’s technically no limit on how many checking accounts you can open, it’s often a good idea to keep your finances simple. So, if possible, stick to a single checking account.

If you own a small business, however, it’s smart to open a second checking account so you can manage your business finances separately.

The Bottom Line

Checking accounts offer a way to simplify your money management. If you shop around, you can even find checking accounts with minimal fees and interest-bearing options.

If you’re interested in additional help with managing your money, download the Rocket Money℠ app.