Complete Guide to Checking Accounts

UPDATED: April 21, 2022

Checking accounts offer a flexible vehicle to hold and distribute funds regularly. These versatile, often free transaction accounts can help you manage money and get it where it needs to go quickly.

What’s the Purpose of a Checking Account?

Each of your financial accounts and investments serve a purpose in your broader financial plan. The checking account will be perhaps your most active account in monthly transactions, making it one of the key players. People use checking accounts to:

• Manage everyday financial transactions securely: The primary purpose of a checking account is to keep your money in a safe place to use for daily financial transactions. Opening a checking account offers a way to protect your money until you’re ready to use it, which offers far more security than carrying cash or keeping money hidden at home.

• Set up transfers, direct deposits, and write checks: A checking account often offers unlimited transactions, in contrast to a savings account, which can place restrictions on how frequently you’re able to move your money in and out of the account. This makes a checking account the best option for managing bill payments via transfers to other accounts or moving money by writing checks.

• Make purchases using a debit card: A debit card pulls funds directly from your checking account instead of charging a balance as with a credit card. Immediate debits from your account allows you to practice better money management by only spending the funds you have available right now.

While checking accounts serve several essential functions, it’s also important to recognize what you shouldn’t expect from your checking account.

• Growth via a high (or even decent) interest rate: Gone are the days of making big money from your checking account. While some checking accounts are interest-bearing, it’s often such a dismal amount that you’re better off looking to put excess funds in a short or long-term investment. Your checking account should contain only the money you’re moving between other accounts and a bit of a cushion to keep you from overdrafts. It’s best to house other investments in a high-yield savings account at a minimum or another form of brokerage account or retirement vehicle to capitalize on growth over time. 

• Extremely high security: Due to the nature of frequent debit card use, your checking account is more exposed to the financial elements. This means your checking account funds may be more prone to fraud than funds set aside in a savings account where you aren’t regularly swiping a card.

How to Choose a Checking Account

There are plenty of banks out there vying to be the institution that holds your money. That means it’s an account holder’s market, and all you’ll need to do a bit of shopping around. When you’re deciding on a checking account, it’s important to consider the following factors:

Opening Balance

This is the amount of money you are initially required to deposit to open an account. While it is possible to find a $0 opening balance account, many banks require that you make some kind of deposit. The amount is generally small for basic checking accounts and might be $1, $25, or $100. 

If you’re working with limited funds to open an account, it’s crucial to compare opening balances between banks before making a final decision.

Account Minimums

With so much cash flowing in and out, some banks encourage account holders to maintain a balance that meets a certain threshold. Certain banks will offset maintenance fees in exchange for your promise to maintain a minimum balance of a specific amount.

Fees

Among the various fees banks may charge, a monthly fee is probably the most painful financially if you need to pay one. Before you open an account, verify if there is a way to waive any monthly fees that may exist, like by setting up a direct deposit from an employer or maintaining a minimum balance. 

The other costs you’ll want to seek out and understand are those for overdrafts if keeping an eye on your balance has been an issue and ATM rebates and fees if you frequently use ATMs out of your banking network.

Interest Rate 

If you plan to keep a bit of money in the account as part of your regular transactions and account buffer, it’s wise to choose a bank that will offer you some money as a result. 

While rates on interest-bearing checking accounts are generally very low, it is possible to get an interest rate of up to 1% with some banks if you search enough.

Transaction Limitations

Most checking accounts are fairly lenient when it comes to checking account transactions, including withdrawals and deposits. If, for some reason, you need to make more transactions than most people, it’s best to check with the bank first to make sure they don’t restrict the number of withdrawals or deposits you can make in a single day or week.

Sign-up Bonus

Some banks may offer you a sign-up bonus to come on board. These bonuses are often earned by meeting some requirements like opening a checking and savings account together. 

A $250 or more bonus may look alluring at the outset, but make sure you fully understand what you’ll need to do to make sure you get the money in your account. 

You’ll also want to contrast that against any potential maintenance fees to make sure you won’t be giving the money right back after a few months.

Bank Reviews 

When you open a checking account, you’re entering into a relationship with the bank. As such, you’ll want to make sure previous customer reviews are positive. You wouldn’t eat at a restaurant with a one-star review, so why bank with one?

Types of Checking Accounts

Now that you know what to look for in a checking account, it’s important to be aware of the several types of checking accounts that exist. You may find that more than one type of checking account appeals to you. 

And nothing is saying you can’t have multiple checking accounts; you’ll just want to be certain that each account serves a definite financial purpose.

Traditional Checking

This is the bare-bones checking account that offers checks, online bill pay, and a debit or ATM card. Traditional checking accounts might have an initial fee to open, but many banks are now turning to offer free checking as a way to attract new customers. It’s a good idea to check with the bank about maintenance or overdraft fees before opening a traditional checking account.

Rewards Checking

Traditionally, credit cards have been the ones that offer rewards for spending. Many credit card companies partner with certain vendors to provide cash back or have standing offers for cash back throughout the year. But certain checking accounts will do the same. 

Rewards checking accounts can offer a certain percentage of money back on purchases or reimbursed out-of-network ATM fees. Be sure to check expiration dates on rewards and payout terms before committing to a rewards checking account.

Student Checking

Many institutions offer checking accounts geared towards students who are often first-time account holders. These accounts generally have age restrictions, which limit enrollment to those between 17-24. The perks of opening student checking may include no-fee overdrafts, ATM reimbursements, or others.

It’s worth noting that you don’t necessarily need to apply for the student checking if another account type might serve you better just because you’re a student. This is simply an added option for those who meet the requirements.

Joint Checking

A joint account is shared by two or more people, giving multiple members the ability to manage day-to-day transactions like deposits and withdrawals. Many people immediately think of joint accounts in terms of married couples. But they can also be opened by business partners or parents who want to establish credit for their children.

These accounts often mirror a traditional checking account when it comes to benefits. The key difference is that there will need to be clear communication between account holders to avoid overdrafts or mismanagement of funds.

Premium Checking

Banks often offer premium checking accounts to select clients who can meet criteria like maintaining a higher daily balance, usually upwards of $75,000 or more. 

In return for holding a substantial amount of funds, the banks extend account holders a slew of benefits and perks above and beyond those of a traditional checking account. Extras may include dedicated member service teams, higher ATM withdrawal limits, and access to special programs like sports or entertainment, depending on the bank.

Business Checking

Businesses have a lot of transactions flowing in and out, often more so than individuals. This makes a checking account a staple of business financial operations. 

The key things to look for when it comes to business checking are transaction and deposit limits. Since businesses regularly deal in more considerable monetary sums than individuals, it’s important to ask questions about limitations before opening an account to ensure the business finances can continue to run smoothly.

Online-only Checking

An online-only checking account may fall into one of the above categories. Still, it’s important to point out the distinct benefits and disadvantages that come with doing your banking solely online. Online banks provide the benefit of:

• Lower Fees: Since online banks don’t need to purchase or staff brick-and-mortar locations, their overhead is lower. This means they generally pass less fees onto their clients, nearly always offering a free checking account option.

• ATM Rebates: With no physical locations, online-only banks are forced to offer reimbursements so their customers can use ATMs affiliated with other banks. Be careful though, while fees are reimbursed, it can sometimes take a month or more before you’ll see the rebates back in your account for use.

• Advanced Online Tools: Because online-only banks can’t service their customers in person, it forces them to develop user-friendly online tools and above-average online customer support. That means additional financial management tools you can use free of charge.

• Higher Interest Rates: Checking accounts often don’t make much, if any, as far as interest is concerned. But some of the highest interest rates on checking accounts are from online-only banks that can offer higher interest rates due to their low overhead.

While there are numerous benefits, there are also a few downsides of online-only checking accounts, like:

• Cash Deposit Struggles: Depositing checks into online-only checking accounts is as easy as taking a picture. Sadly, it’s not so easy with cash. You’ll either need to deposit it into another account first and transfer it to your online account or find an ATM that allows you to deposit funds (most ATMs will only allow withdrawals from online banks). If you frequently deal with cash and often need to deposit sums, a brick and mortar bank close to home or work might be the best option.
• No Personal Interactions: Some people enjoy the relationship with their local bank teller and aren’t willing to give that up, even for a slightly higher interest rate. If you’re someone who needs to perform frequent in-person transactions or wants to watch as their money is deposited and withdrawn, a traditional bank is a better way to go.

Opening a Checking Account

Here’s what you’ll need to open a checking account. It’s worth noting that these restrictions apply for both in-person and online-only checking accounts. In addition to the below, you’ll need to be at least 18 years old or have an adult sign on as a joint account holder.

Government-issued Photo ID 

You will need an unexpired federal identification to open a checking account at any bank. Acceptable forms of identification may vary per bank but often include a driver’s license, passport, state-issued identification card, or U.S. military I.D.

Personal Information

Banks will ask you to fill out a form with details like your date of birth, address, and social security number, or taxpayer identification number if you’re opening a business account.

Proof of Address

Banks will likely ask you to bring an insurance bill, utility bill, or another official document to confirm your physical residence. If your current mailing address is a P.O. box, you’ll want to check with the bank to determine if they’ll allow you to open an account.

Initial Deposit

Frequently, when someone opens a checking account, they’ll deposit a check or provide a cash deposit to fund the account. This initial investment means you can immediately begin to use the account for bill pay, debit card purchases, or writing checks. If you find a bank that supports opening accounts with a zero balance, this won’t be a requirement.

Why Might I be Denied Trying to Open a Checking Account?

While checking accounts are a banking staple with limited barriers to entry, it is possible for someone to be denied when trying to open a checking account. 

When you apply for an account, a bank may check your checking account history using ChexSystems. This reporting agency reviews and provides information about your checking and savings account history.

If the ChexSystems report shows unpaid fees, negative account balances, bounced checks, or numerous overdrafts, it’s within the bank’s rights to deny you an account. Like your credit report, you can file a dispute with ChexSystems if you believe there is misinformation or an error on your report.

Second Chance Checking

If a bank has denied you a checking account due to prior financial missteps, all hope is not lost. Some banks offer what is referred to as a second chance checking account. These accounts are offered by banks willing to work with customers to allow them another opportunity if they have been previously rejected for an account. 

These second chance accounts generally have lower transaction limits and fewer features than those of a traditional checking account. They may also have higher fees to offset the risk of providing an account to someone with a poor banking history. Be sure to shop around if you’re in the position of needing a second chance checking account, as it is possible to find banks that will offer them for no or limited fees.

How Safe is Money in a Checking Account?

Before you open a checking account, you’ll want to confirm the bank you’ve chosen is Federal Deposit Insurance Corporation (FDIC) insured. This stamp of approval means that the money you invest with your bank is secured for up to $250,000. That number is relatively high for a checking account, considering many people use it as a temporary holding zone and therefore don’t tend to keep large sums. Even so, the mark of FDIC insurance can give you peace of mind that the government secures your funds if the bank goes under.

It’s important to distinguish that FDIC insurance covers a banking failure but is not insurance for account fraud resulting from card or identity theft. Whether or not to cover fraudulent transactions on a debit card is up to each bank.

If you suspect your debit card has been lost or compromised, it’s imperative to alert your banking institution immediately so they can freeze your funds and begin to investigate.

Tips for Maximizing Benefits of a Checking Account

A checking account has inherent perks like the ability to access funds quickly. But there are ways to be smarter about using your checking account to its full potential.

• Keep a Buffer: With money continually flowing in and out of a checking account, it can be easy to forget about the check you wrote for the rent payment and end up with an overdraft. It makes good financial sense to keep a buffer to protect yourself from dipping below $0. According to the Federal Reserve’s Survey of Consumer Finances, in 2019, the average checking account balance for an American household was $10,618. That balance is probably high for someone just starting with a checking account. A smaller buffer of a few hundred or thousand dollars will suffice for most people.

• Enable Notifications: At most banks, text and email notifications are highly customizable. These can work in your favor to hold you accountable if you set an alert at a certain threshold or spending limit. The bank can also quickly notify you of any potentially fraudulent charges so you can take action immediately.

• Take Advantage of Setting Up Direct Deposits and Automatic Payments: Especially if you’re prone to missing bill payments, setting up ACH transfers directly to your credit cards, loans, or other bills can be a game-changer. Your checking account will provide you with a routing number and account number that enables you to set up transfers directly, with the added benefit of these types of transactions often being completely free of charge to set up.

• Pair a Checking Account with Savings: Holding a savings account at the same institution as your checking account can make your financial life easier in many ways. A savings account allows you to hold excess funds for a larger purchase that might be coming down the line and allow for immediate transfers if you’re at risk of an overdraft. You can also build up the savings account by quickly transferring excess funds from checking while establishing your emergency fund.

Checking Accounts & Credit Scores

While opening a checking account isn’t going to directly impact your credit report or score, the indirect advantages of having one can help you establish and build credit over time. By taking advantage of automated bill pay and practicing conscious spending habits, you can ensure you don’t miss payments on loans that could negatively impact your score and prove to future lenders that you’re capable of repaying loans responsibly.

Summary

A highly flexible, inexpensive checking account can be just the solution for your day-to-day money management needs. Whether you’re looking to open another checking account or if it’s your first time, know that opening a checking account is one of the best steps to lead you down a path of better financial management.