What is a Checking Account – When Do You Use One?
Banks are an integral part of our society. They offer a variety of deposit accounts, investment vehicles, and debt products.
At the most basic level of your bank’s offerings lies the humble yet powerful checking account. Yet there’s more to checking accounts than meets the eye.
Arming yourself with this knowledge helps you in your financial decision-making and financial goals, so keep reading to learn more about the ins and outs of this seemingly simple yet multi-dimensional bank account.
Checking Accounts
Checking accounts are the simplest form of bank accounts. They serve as a safe and convenient place to park your spending money.
They’re bested in convenience and access only by the “mattress money” method, aka hiding your money at home.
But everyone knows the dangers of doing that, so checking accounts are the simplest rational way of storing your spending money.
Features
Checking accounts might sound simple, but they have a few features you should know about.
Checks
It’s in the name. Checking accounts come with a checkbook you can use to make payments. Checks are usually used for larger payments or bills, such as rent or utility bills. Using them for everyday spending, such as on groceries and clothes, is more inconvenient, a bit wasteful of your checks, and considered odd by many.
Banks generally provide your first stack of checks for free. When you run out, you can buy more from the bank to replenish your stock of checks – which is exactly why checks should be saved for larger payments and bills.
Debit Card
As mentioned, using checks for everyday spending just isn’t doable. Checking accounts remedy this with debit cards. Debit cards can be used to spend money on your purchases, pay bills, and withdraw cash from ATMs.
Debit accounts have some safety and security features built in. If you lose your card, you can call your bank to cancel it and they’ll send you a new one.
And if you find any purchases on your statement that don’t sound right, you can request to have these charges cancelled.
eChecks
Nowadays, check usage is shrinking in favor of electronic checks, or eChecks. This is basically an ACH payment using your checking account. You provide your bank account and routing numbers, the check amount, and a memo if you’d like, just like a paper check.
You probably already use eChecks. Do you pay your rent bills online? How about your utilities? If you’re paying those using your bank account and not a credit card, you’re using an eCheck.
eChecks let you duck those steep processing fees your landlord or utility company might charge you for using a credit card. No cashback, sure. But no exorbitant fees, either.
Fees
Checking accounts are generally cheap to maintain, but they have a few fees attached to them.
Maintenance Fees
Most checking accounts require you to maintain a minimum monthly balance and/or set up direct deposit and deposit a minimum monthly amount; otherwise, you have to pay a small monthly fee that can run up to $15 per month.
To avoid it, simply meet the minimum balance/direct deposit terms of your checking account. As long as you’re employed in some fashion, you can probably meet theses requirements.
Overdraft Fees
Unlike debt, you can’t spend money you don’t have out of your checking account. Most banks will charge you overdraft fees if you attempt to spend/withdraw more cash than you have available in checking.
These fees can be steep: they’re generally around $30, which is way too much money to waste just for accidentally (or even intentionally) trying to use more money than you have.
Notice how we said “most” banks charge overdraft fees. Many use other methods. For example, Capital One 360 charges you a set interest rate on the amount you withdraw until you pay it back. If you’re strategic, overdrawing can act as a short-term loan if you’re strapped for cash.
Other banks simply decline your debit card. Could be inconvenient or embarrassing when it happens, but hey, it’s better than being out $30.
ATM Fees
When you use your debit card to draw money from an ATM that isn’t from your bank (or an ATM that isn’t from any bank at all), you could get hit with a service fee. Some of these service fees can be over $3, just to get some cash in your hand!
You can avoid ATM fees one of two ways:
- Only withdraw cash from your bank’s ATMs
- Open a checking account that reimburses you for ATM fees
For the latter, credit unions and online banks tend to offer ATM fee reimbursement for any ATM. For example, Ally’s interest-bearing checking account reimburses up to $10 in ATM fees each statement cycle (month).
Bounced Check Fees
Bounced check fees, or NSF (Non-Sufficient Fund) fees, are basically overdraft fees but specifically for checks. If you write a check to someone and your checking account doesn’t have enough cash, your bank will charge you a fee.
However, the intended recipient will charge you another fee. They get charged for attempting to deposit a bad check, so they’ll pass the charge onto you since it’s technically your fault.
Get your account balance squared away as soon as possible, because you’ll get hit with these fees again if the recipient thinks you have the funds to cover the check and goes to deposit it again.
Stop Payment Fees
Write the wrong amount or recipient on your check? You can cancel it, but it’ll cost you a stop payment fee. These usually run $15+ per occurrence, so triple check (no pun intended) your check information before sending it off.
Pros of Checking Accounts
Unlimited Access
Checking accounts are built for spending. Neither the government nor basically every bank puts withdrawal/transfer limitations on checking accounts.
Savings accounts, on the other hand, are limited to 6 monthly withdrawals per government regulation. If you go beyond that, you’ll be charged a penalty.
That’s by design: checking accounts are meant for spending, and savings accounts are meant for saving. Without these regulations, the bank wouldn’t be able to use your savings to lend out to others (banks make money by lending your savings at a higher rate than the rate they pay you), rendering the separation between the account types pointless.
No Need for Carrying Cash
Without a checking account, you’re forced to carry cash around any time you need to make a purchase. Larger purchases are riskier because you’ll have a wad of cash in your wallet, which isn’t exactly easy to recover if lost or stolen.
Not to mention that an overstuffed wallet is simply inconvenient.
But with a checking account, no cash is needed. Instead, you get a debit card that basically acts like a swipeable check. Need to make a purchase? Swipe/insert chip/tap/whatever you have to do to spend the money.
Thief stole your debit card? Or maybe you dropped it one night at the bar and forgot it? Just cancel the card and wait for your new one to show up.
Suspicious purchases show up on your debit card? You can dispute the charges and potentially get your money back.
Can’t say the same for cash in any of the above scenarios.
FDIC Insurance
Checking accounts are generally covered by the FDIC for up to $250,000. Yes, that means they’ll pay you up to that amount if the bank goes under, burns down, or some cyber thievery occurs.
If you stuff your cash under the mattress, you might be less vulnerable to cyber thievery, but no one can say what’ll happen to your cash in case of a fire, other natural disaster, or old-fashioned thievery.
Spending Records
Using your checking account to spend ensures there is always a record of your spending.
If you write a check, you have the check as proof. If you swipe your debit card, the transaction will show up on your bank statement.
No matter what, you have documentation that you spent money.
This documentation makes personal financial management tasks like budgeting, expense monitoring, and tax filing a lot easier.
Low/Avoidable Fees
Checking accounts have fees attached to them like we described above, yet these fees are either much lower than you’d find elsewhere or easily avoidable.
For example, monthly maintenance fees on checking accounts are not that high (and sometimes nonexistent) and easily avoidable. ATM fees can be dodged by using the right ATM or banking with an institution that reimburses you, overdraft fees can be avoided by not overdrawing your account, etc.
Cons of Checking Accounts
No Interest (Usually)
Checking accounts generally pay no interest, but that’s by nature; they’re meant for spending, not saving, so the bank doesn’t expect you to stash significant amounts of cash away for long-term growth or storage.
That’s what savings accounts are for.
More high-yield checking accounts are flooding the market as online banking becomes more popular. Yet even these interest rates are paltry compared to savings accounts and other bank products; interest-bearing checking accounts never keep pace with inflation.
But at least your spending money loses value a bit more slowly.
Reckless Spending Potential
Checking accounts slot in between cash and credit cards in terms of ease of spending. Money is docked from your account right away (unlike credit cards), but it’s still much easier to swipe that piece of plastic than it is to watch green bills leave your possession.
If you don’t monitor your spending, or if your prone to reckless card-swiping, you’ll always find yourself low on or out of cash.
Take it further, and you might overdraw your account and incur more fees. Don’t get too trigger happy with that debit card.
No Credit-Building
Credit cards may be easier to abuse than debit cards, but debit cards (or any checking spending, for that matter) don’t build your credit history, aside from paying off your credit card bill.
Even worse, banks may report account overdrawing or other negative activities associated with your checking account. You can’t win, but you CAN lose here.
What Should You Look For in a Checking Account?
If you’ve come this far, you now have a comprehensive understanding of checking accounts and their features. But how do you choose a checking account?
Here are a few criteria to consider that might help your search.
Low/No Fees
Nobody likes paying the fees we listed earlier. Make checking accounts with low or no fees a priority, because there’s little worse than spending money just to maintain your money.
You won’t have to worry about maintenance fees as long as you have an average income and you set up direct deposit. But overdraft and ATM fees do require a little more consideration.
Large ATM Network
Avoiding those pesky ATM service fees is easy with a larger ATM network. Large banks like Chase or Fifth Third have ATMs everywhere, making it easy for their customers to get their money fee-free.
Of course, you can always go for someone like Ally who will reimburse you for ATM fees.
Signup Bonuses
Don’t pick your checking account just because they’ll pay you $100 for signing up. That money won’t be worth it if you’re nickel-and-dimed at every turn.
However, when weighing 2 checking accounts comparable in features and fees, the one with a larger signup bonus is almost always the obvious choice.
Customer Service
Customer service affects all your accounts, not just your checking account. You want the best customer service possible because after all, we’re talking about your money.
The best bank customer service departments are friendly, fast, helpful, and have a large amount of availability.
You can learn about a bank’s customer service through both online reviews and word of mouth. Ask any family or friends about their experience with a bank, then research reviews and ratings online to see what others have to say.
What About Online Checking Accounts?
Online banks are becoming commonplace thanks to technological advancements. Online checking accounts generally pay interest, have less fees than normal checking accounts, and reimburse almost any ATM fees you might pay.
If you’re willing to forego physical branches, online checking accounts might work even better for you than traditional ones.
