What is a checking account?
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Key takeaways
- Checking accounts are commonly used for paying bills, writing checks, making debit card purchases and ATM cash withdrawals.
- A checking account can also serve as a place to receive your payroll direct deposited as well as to send money digitally to friends and family.
- Checking accounts are often covered by federal deposit insurance. Most checking accounts don't bear interest.
A checking account is a bank account that’s designed to be the hub of your financial life, and it’s easy to deposit money into these accounts and withdraw funds, as needed.
What is a checking account used for?
Many consumers use checking accounts to pay bills, write checks, make debit card transactions and transfer funds electronically to savings or investment accounts.
Other common uses for a checking account include receiving payroll direct deposited, withdrawing cash at an ATM, and making wire transfers and person-to-person payments.
Unlike savings accounts, checking accounts don’t limit the number of transactions you can make or charge fees for excessive transactions.
Benefits of checking accounts
Checking accounts keep your money safe and accessible, and they make it easy to automate your money management.
Safety
Using a checking account debit card for purchases can be safer than carrying around large amounts of cash, which can help protect your money should your wallet become lost or stolen.
If your checking account is with a federally insured bank or credit union, your money is safe, even if your bank fails, as long as your balance is within the established limits and guidelines. Through the Federal Deposit Insurance (FDIC) or National Credit Union Share Insurance Fund (NCUSIF), funds are insured up to $250,000 per depositor, per insured financial institution, per ownership category.
Ease of access
A checking account makes it easy to access your money using a debit or ATM card, checks and online payment features. It can be used for everything from retail purchases to rent or mortgage payment to automated bill payments.
If you need to pay your friends or family, many checking accounts feature a peer-to-peer transfer service, such as Zelle, that you can use from your smartphone or computer. You can also link your account to other services like Venmo to make quick transfers.
Automation
Checking accounts make it easy to automate money management. You can set up direct deposit so paychecks are automatically credited to your account, eliminating the need to manually deposit your funds each time you get paid.
You can also set up automatic payments so money is deducted to pay your credit card, utilities and other bills on their due dates.
Access to overdraft protection
Overdrafts can occur when you withdraw more money from your account than you actually have in it and your balance dips below zero. The overdraft fees the bank charges you to cover your payment can be expensive. Many checking accounts offer overdraft protection, which automatically transfers funds from your savings account or a line of credit when your checking account is overdrawn. Overdraft protection can help you avoid pricey overdraft fees and allow your payment or debit to go through.
Checking vs. savings accounts
A checking account is fundamental for making day-to-day financial transactions, while a savings account is a good place for funds set aside for emergencies, or financial goals such as a vacation or a new car purchase.
- Primary use
- A checking account is typically used for money you’ll spend, whereas a savings account holds money you’re holding onto.
- Interest
- Many checking accounts earn no annual percentage yield (APY), while those that bear interest often pay a minimal rate. Savings accounts typically earn an APY, and the rate varies by bank.
- Limits on transfers
- While a checking account allows for an unlimited number of transactions, savings accounts limit transfers to six a month in most cases.
Common checking account fees
When shopping around for the right checking account, pay attention to what fees may be charged. While free checking accounts are widely available, many checking accounts do charge fees, and some common ones include:
- Monthly maintenance fees: Not all checking accounts have these, and those that do may waive them when you meet certain requirements, such as signing up for direct deposit, maintaining a minimum balance or making a set number of debit-card purchases.
- ATM fees: Your bank may provide its own ATMs or give you access to a network of fee-free ATMs like Allpoint or MoneyPass. Using ATMs outside the network could result in fees from your bank as well as the ATM owner. Some banks reimburse up to a set amount of these fees each month, and you can also avoid them by getting cash back from a debit card purchase instead of using an ATM.
- Overdraft fees: Withdrawing more money than you have in your checking account can result in an overdraft fee. The average overdraft fee is a hefty $26.61, according to a 2023 Bankrate study. You can avoid these automatic fees by opting out of them with your bank, whereby the bank will return payments as unpaid that overdraw the account. You can also choose overdraft protection or choose a bank that doesn’t charge overdraft fees, such as Capital One or Ally Bank.
Types of checking accounts
Traditional checking
These accounts normally provide checks, a debit or ATM card and online bill payment access. Some charge maintenance fees, which are often easy to avoid by meeting set requirements. Overdraft protection may be provided to cover payments that would otherwise have overdrawn the account.
Interest checking
Interest-bearing checking accounts often allow you to earn a certain APY in exchange for having your paycheck directly deposited or making a minimum number of monthly debit card transactions. The APYs earned by many interest checking accounts, however, are only a fraction of what many high-yield savings accounts earn.
Student checking accounts
Often available to students in their teens or 20s, these accounts can offer valuable perks to anyone learning to manage their money, such as overdraft forgiveness, free checks, no maintenance fees or the reimbursement of ATM fees.
Senior checking
These accounts may offer benefits attractive to those age 55 or older, such as free checks and money orders, as well as fees that are easy to waive. If you’re looking for these perks, however, you might find them in many traditional checking accounts as well.
Second-chance checking
Anyone who has been denied a traditional checking account based on a history of excessive overdrafts or unpaid overdrawn balances might consider a second-chance checking account. These accounts often impose certain restrictions and fees, yet some allow customers to move to a traditional checking account after handling the second-chance account responsibly for a defined period.
You can find second chance accounts at banks like Wells Fargo, Chime and Varo.
How to choose a checking account
There are various factors to consider when shopping around for a checking account:
- Monthly maintenance fees
- These fees can eat away at your balance over time, but it’s not hard to find a free checking account that doesn’t charge these fees. Those that charge service fees often make them easy to avoid when you maintain a set minimum balance.
- ATM availability
- The average out-of-network ATM fee is $4.73, Bankrate’s latest ATM study found. This includes the average surcharge from the ATM’s owner as well as one from a consumer’s own bank. To avoid such fees, choose a bank that offers plenty of its own ATMs, or one that belongs to a large ATM network.
- Digital banking
- If you prefer to do most or all of your banking online, it can pay to find a checking account at a bank that offers mobile check deposit, online bill pay and a peer-to-peer payment option.
- Branch availability
- Those who prefer in-person banking should open a checking account at a bank that maintains nearby branches.
How to open a checking account
Once you’ve shopped around and chosen the best checking account, you can start the process of filling out an application, which typically involves providing some personal information and government-issued ID, like a driver’s license.
If you’re funding your new account from your old checking account, you’ll also need both the routing number and account number for your old account. This information will enable your new bank to transfer funds from your old account to the new one. If you’re opening an account in person, you might be able to make your initial deposit with a check or cash.
Once your account is open and ready to use, take the time to understand its features. Sign up for online banking, download your bank’s app, and set up automated payments and direct deposit.
Review the latest statement from your old bank to ensure you haven’t missed transferring any automated payments from the old account to the new one. Also, update your employer’s payroll manager with your new account information to ensure your direct payroll deposit goes to the correct account. Human resources can usually help make that change.
Once a couple of months have passed with no automatic bill payments from your old account, you should be ready to close it and continue on with only the new checking account.
Bottom line
Be sure to find the right checking account for you, whether it’s one that has a robust ATM network, charges no fees, or offers the ability to earn interest. Once you find the account that suits your needs, you’ll appreciate the versatility and ease with which it enables you to handle your day-to-day finances.
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