how checking accounts work
a checking account is also known as a share draft account at a credit union these accounts serve your short term cash needs as you deposit and withdraw money you add money via paychecks cash gifts transfers or direct deposit you take money out using checks electronic transfers at an atm or using a debit card for in person or online purchases you can generally set up automatic bill payments through your checking account if you open a checking account at a bank the federal deposit insurance corporation fdic insures your money up to 250 000 per individual depositor and insured bank if your bank fails your money should be safe if your account balance isn t more than the fdic limits if you open a checking account at a credit union your money will get the same kind of protection from the national credit union association unlike savings accounts checking accounts generally don t pay interest and if they do pay interest the rate tends to be low even in a high rate environment in january 2024 the average savings account rate is roughly four times more than the average rate for an interest bearing checking account checking accounts with higher interest might impose specific requirements to score the higher rate for example you must maintain a high balance or make many debit card transactions monthly while checking accounts may not offer interest many banks and credit unions provide cash back debit cards when you pay for an item with your debit card you can earn back a percentage of the amount spent you can also earn a new customer bank account bonus of several hundred dollars if you meet certain conditions typically requiring direct deposits banks make money by charging fees for checking accounts including maintenance fees or using an atm outside the bank s network you may be able to avoid some fees for example a bank might not charge a maintenance fee if you make a certain number or amount of direct deposits types of checking accountschecking accounts come in several varieties a regular checking account typically pays little or no interest although some offer a flat interest rate regardless of your balances others pay more interest on higher balances some traditional accounts don t charge recurring fees such as monthly maintenance fees but they may require a minimum balance to avoid fees if you have a lot of cash to stash in a checking account or need personal banking services check out a premium checking account with a high balance you can avoid fees and enjoy perks such as atm fee reimbursements and higher interest earnings a joint checking account allows two or more people often spouses to write checks and make deposits the ownership of a joint account may depend on the institution state law and how you set up the account ensure you understand what happens to the money in a joint account if an account holder dies or a divorce or separation occurs you may be legally responsible for your joint owner s debts joint owners may benefit from higher fdic insurance amounts business accounts may be offered to small business owners and larger or global commercial entities authorized business officers managers and employees can use a business checking account to cover expenses a business account can only be opened by a legitimate business and you may need to provide documentation to the bank regarding your business some banks offer student checking accounts for high school students and college students these accounts feature perks such as low or no maintenance fees and no minimum balance requirements high school student accounts typically require parent involvement as a co owner or co applicant while those for college students do not sometimes known as lifeline accounts these accounts are designed for customers who can only maintain a small balance but still want access to banking services but the bank might limit the number of checks you can write or require paperless statements if a bank previously shut down your checking account you might need to get a second chance account keep an eye on potential fees and rules around keeping your account balance positive some banks offer checking accounts geared toward seniors over a specified age the benefits of these accounts include no fees and discounts on banking products and services checking account overdraft feesif you purchase something that costs more than your checking account s contents your bank might cover the difference through overdraft protection but it will charge you a fee to do so overdraft coverage is technically considered a type of loan with pros and cons for example if you have 50 in your checking account and buy a shirt for 70 using your debit card the bank might approve the purchase transaction however the bank might charge a 20 overdraft fee for that purchase or any other purchases until you add money to your account if your account remains overdrawn your bank also might charge daily interest you can avoid overdraft charges in several ways in january 2024 the consumer financial protection bureau proposed curbing overdraft fees charged by very large u s banks fees that typically run 35 checking account serviceshere are the various services that likely accompany your checking account direct deposit lets your employer electronically deposit money into your bank account this gives you quicker access to money than receiving and depositing a paper check banks also benefit from direct deposits due to the steady inflow of cash so many banks provide benefits like free checking if you set up direct deposit for your account a wire transfer is an electronic funds transfer that moves money from one bank account directly into another account even internationally it allows money to be moved securely without the need to exchange cash atms let you easily access cash or make check or cash deposits these machines can be found at branches malls airports and convenience stores before using an atm understand the fees your bank charges for using an out of network atm debit cards provide a convenient way to shop as they re accepted similarly to credit cards debit cards draw from the funds in your bank account but you can also use the cards to withdraw cash at an atm many banks offer zero liability fraud protection to help guard against identity theft if your debit card is lost or stolen you can schedule or make automatic payments for usual utility and rent bills you can even pay another person electronically or with a bank mailed paper check often at no cost checking accounts and interestchecking accounts usually pay lower interest rates than savings accounts if they pay any interest some high yield checking accounts offer higher interest rates than the average interest rates on high yield checking accounts might be three to six times higher than the rates that a regular checking account pays accounts that pay higher interest might impose specific requirements for example you must maintain a high balance or make many monthly debit card transactions checking accounts and credit scoresmost basic checking account activities such as making deposits making withdrawals and writing checks don t affect your credit score closing checking accounts in good standing also won t impact your credit score however overdrawn checking accounts may appear on your credit report if you don t repay the money you overspent your bank could send that item to collections if you don t repay an overdraft loan this could potentially harm your credit score 