A checking account is an account based at a financial institution where one can store money for everyday use. A debit card is used to access the funds in these accounts at an automatic teller machine (ATM), a purchase terminal, or online. The fact that an account holder can freely withdraw and spend money in checking accounts makes them different than other financial accounts, such as savings accounts or retirements accounts. In the United States, anyone over the age of eighteen can open a checking account, and minors over fourteen are allowed to be co-account holders on joint accounts.
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How Does a Checking Account Work?
Money is deposited into a checking account either through a bank or direct deposit and withdrawn or spent as desired. Debit cards can retrieve money from ATMs and pay for in-store and online purchases. Paper checks can also be used as a substitute for cash, though they are no longer widely in use.
There often are fees associated with checking accounts, depending on what kind of account one gets. However, the two common fees are monthly service fees and overdraft fees.
- Monthly service fees are the maintenance fees required to own the account if a specified balance is not maintained. Many banks waive this fee for direct deposit users.
- Overdraft fees are applied when there is a charge on the account that the balance cannot cover. Overdraft protection is a feature offered by many banks when an account holder has a savings account as well as a checking account. In this case, the bank will automatically draw from the savings account to cover the charge.
Checking accounts provide liquidity_, which is synonymous with cash. They typically do not earn interest, as they are intended to be used for daily purchases and payments.
Different Types of Checking Accounts
There are five main types of checking accounts to choose from, based on the intended use.
- Basic checking is a regular account for depositing money and making purchases. There is usually a minimum balance and monthly service fee.
- Interest-bearing or money market accounts pay interest on higher balances. While these can be used for purchases, the minimum balance is likely to be markedly higher than other checking accounts.
- Free checking has no minimum balance and no monthly service fee. These accounts are good for users who live paycheck-to-paycheck or who don't plan to keep large amounts of money in their accounts.
- Student checking is for students only. There is usually a maximum account-holder age, depending on the bank. Student status entitles the account holder to the perks of a basic account without the minimum balance or service fees.
- Joint checking allows two people to have equal access to a basic checking account. People who are married or otherwise financially entwined may find it easier to keep their earnings in the same place.
Benefits of a Checking Account
- No need to carry cash: While cash is still required at some stores and easier to hand over to another person, stuffing a wallet (or mattress) with paper bills is no longer necessary.
- Save on check-cashing fees: Whether a check is directly or manually deposited, the service is included with the checking account for no additional fee, unlike check-cashing agencies.
- Money is a liquid asset: The money in the account can be converted to cash with a simple trip to the bank or ATM.
- Online/phone purchases: Cash cannot be used to shop online or pay bills over the phone.
- Direct deposit: It can take up to five days for a manually-deposited paycheck to "clear" one's account. Direct deposit usually provides next-day access to funds.
- Statements to track spending: Unless a person keeps meticulous written records of their cash spending, they won't know what they bought or when they bought it. With a checking account, deposits and withdrawals are automatically documented and accessible at any time via phone or online account portals.
- Bill pay: Most banks will mail checks using funds from a checking account to anyone the owner wishes to pay.
A person or business should strongly consider opening a checking account when they start generating income.
Disadvantages of a Checking Account
- Little to no interest: These accounts are for everyday spending, not for generating interest.
- Fees: People without direct deposit who cannot meet the minimum required balance will have to pay monthly service fees.
- No physical cash: If a person wants cash, they need to go to an ATM and withdraw it.
- Remember personal identification number (PIN): A four-digit number is required to access money at the ATM and pay for purchases in stores.
- Doesn't build credit: Checking accounts are not reported to credit bureaus.
- Security inconvenience: The bank may "freeze" the account if they believe there has been fraudulent activity, which can temporarily impede access to funds.
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