What Is a Checking Account and How Do They Work?

Vault’s Viewpoint

• With checking accounts, consumers can easily deposit and withdraw funds from a bank.
• Unlike saving accounts, checking accounts are ideal for short-term spending.
• Most checking accounts are insured for up to $250,000.

What is a Checking Account?

A checking account is one of the most basic types of accounts you can open with a bank. Whether you’re looking for a place to deposit your first paycheck, stash away some extra cash, or conveniently manage your money, checking accounts are ideal for short-term and medium-term spending like paying bills, making purchases and saving for a rainy day.

Checking accounts aren’t the best place to store long-term savings. They typically have low interest rates and don’t offer many other perks or benefits. But they’re still a foundational type of account when it comes to managing your money. Checking accounts are typically the point through which all incoming funds flow.

How Does a Checking Account Work?

Checking accounts have two main functions. First, they let you deposit funds and store them securely. Then, when you need to pay a bill or make a purchase, you can quickly and easily withdraw funds from this account.

Some banks require customers to deposit a certain minimum amount in order to open an account. There are a variety of ways that consumers can fund a checking account. These include:

• Direct deposit
• Depositing cash at a bank or ATM
• Receiving a wire transfer
• Depositing a check

Once your account is funded, you can withdraw funds as necessary. Some options for accessing the funds in your account include:

• Withdrawing cash from a bank or ATM
• Using a debit card
• Transferring funds electronically

Types of Checking Accounts

There are a few different types of checking accounts available. Some, like student checking accounts, are available only to certain demographics. Others, like high-yield checking accounts, are available to most consumers. What type of checking account is right for you depends on a variety of factors, including your background, what you’re looking for in a bank and how you plan to use your account.

Traditional Checking Account

A traditional checking account is a basic checking account available to most consumers. It typically has a very low interest rate and is designed for short-term spending and money management. This simple, no-frills account allows you to safely and securely store your funds and withdraw them as needed.

High-Yield Checking Account

A high-yield checking account is similar to a high-yield savings account. It typically offers much higher interest rates than a traditional checking account. You could currently earn up to five percent APY or more. For example, if you have $1,000 in a high-yield checking account with a five percent APY, you could earn an extra $51 in interest over the course of a year.

Student Checking Account

Student checking accounts are designed specifically for young borrowers who are still in school. They include the same features as a traditional checking account but may include extra protections for young consumers still learning to be financially independent. For example, they may have lower fees or lower deposit requirements. While these accounts typically have an age limit, the exact ages that qualify for a student account vary from bank to bank.

Business Checking Account

Whether you’re a freelancer, entrepreneur, or own your own business, it’s a good idea to keep your business finances and personal finances separate. A business checking account can help you to clearly delineate between business and personal income. Business checking accounts may also come with additional features, like the ability to process credit card payments or add employees as account users.

Second Chance Checking Account

If you’ve faced some financial struggles in the past, you may find it difficult to open up a new checking account. Banks reference your banking history when deciding whether to approve your application to open an account. If you have a history of overdrawing your account, failing to pay fees or bouncing checks, your application is more likely to be denied.

A second-chance checking account is designed for consumers who may have a less-than-stellar banking history. These accounts may come with additional fees and requirements, so they may only be a good choice for those who are unable to open a traditional checking account.

How to Open A Checking Account

In order to open a checking account, there are a few steps you’ll need to take. First, you need to decide where you want to open your account. Then, you’ll need to submit an application.

Banks typically request personal and financial information including your name, social security number, and a driver’s license or other government-issued ID. You may also have to put down a minimum initial deposit. Once your application for a checking account is approved, you can begin depositing and withdrawing funds as needed.

How to Choose a Checking Account

When deciding on a checking account, look for the following features to find one that fits your needs:

• Low fees: The best checking accounts don’t charge a monthly fee and have minimal overdraft fees.
• Sign-up bonus: Some banks offer a welcome bonus when you sign up for a new checking account.
• High interest rate: A checking account with a higher interest rate can help put your money to work earning a little extra on your savings.
• Accessibility: Whether you’re interested in a bank with brick-and-mortar branches in your area or prefer to bank entirely online, be sure to choose a bank that meets your needs.
• Customer satisfaction: Look for a checking account from a bank with a history of customer satisfaction and consumer-friendly policies like overdraft protection.
• Perks for multiple accounts: If you already have a bank you like, opening a checking account there may make sense. Some banks offer perks like higher interest rates and fewer fees if you keep a certain balance across all of your accounts.
• ATM access: If ATM access is important to you, make sure to look for a bank with a robust network of ATMs in your area.
• Tools and features: Some banks offer additional tools and features that can help you to manage your money, such as a mobile app or budgeting and savings tools.

Checking vs. Savings Account

Checking accounts are designed for short-term money management. In most cases, a checking account is where your paycheck will be deposited and where you’ll withdraw funds to make purchases, pay monthly bills and transfer money to other long-term savings and investment accounts.

Savings accounts, on the other hand, are designed for long-term money management. They typically come with limits for how often you can make withdrawals from the account. They also usually earn more interest than a checking account. Savings accounts are a great place to stash your financial safety net or save up for a rainy day.