What Is a Checking Account? Here's Everything You Need To Know

What Is a Checking Account?

A checking account is a deposit account that allows you to easily make withdrawals, deposits, and fund transfers. Also called demand accounts or transactional accounts, checking accounts can be accessed using checks, automated teller machines (ATMs), and electronic debits, among other methods. They are often used to keep money for short-term expenses.

How Checking Accounts Work

Setting up a checking account at a bank or credit union is generally easy. You can apply online, or visit a bank branch, and often get a checking account immediately. You will just need to provide basic personal information such as your Social Security number and identification.

Then, you can deposit funds into the account with cash or a check. (Some checking accounts charge a fee if you do not meet their minimum deposit amount.) You will typically receive a debit card. After that, you can deposit and withdraw your money as you like using ATMs, checks, or in-person transactions. You can also use your checking account to make balance transfers or pay bills online.

Funds in a checking account at a bank are guaranteed by the Federal Deposit Insurance Corp. (FDIC) up to $250,000 per individual depositor, per insured bank. That means if you have less than that amount and your bank fails, your money will be safe. Any amount over the FDIC limit is at risk. If you're opening a checking account at a credit union, your funds will get that same kind of protection by the National Credit Union Association.

Types of Checking Accounts

Checking accounts come in several types designed for different purposes. For example, a commercial checking account is used by businesses. The business’ officers, managers, or employees will have authority to use the account for business expenses.

Some banks offer student checking accounts for college students with perks like not having maintenance or minimum balance fees as the students learn how to manage finances.

Other types of checking accounts include second chance accounts, which are accounts designed for people who don't qualify for a traditional checking account. They often have more restrictions and charge a fee. They also typically do not provide overdraft protection.

Checking Accounts and Banks

Banks make money through the fees on checking accounts. They can also use checking accounts to attract consumers who may then be more likely to take out personal loans, mortgages, and certificates of deposit (CDs) with that bank.

Aggregate balances of money held in checking accounts are used to calculate the M1 and M2 money supply.

Checking Accounts and Overdrafts

If you make a purchase for more than you have in your checking account, your bank may cover the difference through overdraft protection, then charge you a fee.

For example, if you have a $50 account balance, and you make purchases for $70 using your debit card, you will be allowed to complete the purchase transaction. However, you may be charged a $20 overdraft fee for that purchase or any purchases after that until you make a deposit to bring your account balance positive.

You can avoid overdraft charges by choosing a checking account with no overdraft fees. You can also set up balance alerts to notify you when your checking account balance is low. Or, some banks allow you to link another account to your checking account, so the funds from the second account can be used to cover any overdrafts.

Checking Account Services

Direct Deposit

Direct deposit allows a company, such as your employer, to electronically deposit money like your paycheck into your bank account. The funds are then immediately available to you.

Banks also benefit from direct deposits because it gives them a steady flow of income to then use to lend to other customers. So, many banks will provide benefits like free checking if you set up direct deposit for your account.

Wire Transfer

A wire transfer is an electronic funds transfer that moves money from one account directly into another account. It allows money to be moved securely without the need to exchange cash.

ATMs

ATMs allow you to access cash any time. They are machines located at branches or in other public locations such as malls, airports, or convenience stores. Make sure you fully understand the fees your bank charges for using ATMs that are out of their network.

Debit Cards

Debit cards provide a convenient way to make purchases. They are often be accepted as a form of payment where credit cards are accepted. Debits cards draw from the funds in your bank account and not on a line of credit, so you will not be charged interest on purchases.

You can also use a debit card at an ATM to withdraw cash. Many banks offer zero-liability fraud protection for debit cards to help protect against identity theft if a card is lost or stolen.

Checking Accounts and Interest

Checking accounts usually have low interest compared to savings accounts, if they have any interest at all.

Some checking accounts are considered "high yield," and they pay higher interest rates than the average checking account. Interest rates on high yield checking accounts may be three to six times higher than the rates that a regular checking account pays—if it pays any interest at all.

Checking Accounts and Credit Scores

Most basic checking account activities—such as making deposits and withdrawals and writing checks—do not have an impact on your credit score. Unlike credit cards, closing checking accounts in good standing also will not affect your credit history.

Overdrafts on checking accounts being overdrawn do not appear on your credit report as long as you repay the money you overspent. If you do not pay back a line of credit extended to you for an overdraft, your bank could send the items to collections and that could negatively impact your credit score.

Keep in mind that some banks do a soft inquiry, or pull, of your credit report to find out if you have a decent track record of handling money before they offer you a checking account. Soft pulls have no impact on your credit score, although they may appear on your credit report.

Being Denied a Checking Account

Banks and credit unions usually look at your checking account report before they will allow you to open a new account. If they see you have a history of writing bad checks, they could deny you a checking account. You may also be denied a checking account if you cannot provide the proper identification.

Chronically bouncing checks, not paying overdraft fees, committing fraud, or having an account “closed for cause” can all result in a bank or credit union denying you a new account.

If a bank has closed your checking account or you can't qualify for a new one, you could turn to second-chance checking accounts offered by many banks and credit unions. After you've maintained the account in good standing for a certain period of time, you may qualify for a traditional checking account.

The Bottom Line

A checking account, as a highly liquid account that has FDIC protection, can be a great place to keep your money for short-term purchases. If you are considering opening a checking account, compare the terms of checking accounts from several different banks. Make sure you fully understand the fees, benefits, and interest rates associated with them.