What is a checking account?
A checking account is a bank or credit-union account intended for everyday transactions—receiving paychecks, withdrawing cash at ATMs, paying with a debit card, and making online bill payments. At credit unions, the same product is often called a “share draft” account.
How checking accounts work (short)
You deposit money by cash, check, ATM, or direct deposit. You spend from the account using a debit card, checks, electronic payments, or mobile apps. The account balance is updated as deposits and withdrawals post. Account terms—fees, minimum balances, interest rates, ATM networks, and overdraft rules—are set by the financial institution and explained in the account agreement.
Key features to understand (definitions first time used)
– Direct deposit: electronic transfer of recurring payments (e.g., paycheck) into your account.
– Debit card: card linked to the account for point-of-sale purchases and ATM withdrawals.
– ATM (automated teller machine): machine for cash withdrawals and some deposits.
– Minimum balance: required account balance to avoid fees or to earn certain perks.
– APY (annual percentage yield): the annualized return on an interest-bearing account after compounding.
– Overdraft: when you spend more than your available balance; institutions may charge overdraft fees or decline transactions.
Common features
– Fees: monthly maintenance fees or per-transaction fees may apply but are often waivable by meeting conditions (minimum balance, qualifying direct deposits, number of transactions).
– Interest: some checking accounts pay interest, usually lower than savings accounts and often conditional on balance or activity requirements.
– Access: online/mobile banking, ATM networks, and in-branch services vary by institution.
– Bill pay and transfers: most accounts let you pay bills online and move money between accounts.
Major types of checking accounts (brief)
– Traditional/basic checking: low-friction daily account; may or may not charge a monthly fee.
– Premium checking: requires higher balances (sometimes tens of thousands) and offers perks such as waived ATM fees or better loan pricing.
– Joint checking: two (or more) owners share full access to the funds.
– Business checking: for companies—opening requires business formation documents and tax ID.
– Student checking: scaled-down accounts for students, sometimes with parental co-ownership for minors.
– Low-balance / lifeline accounts: low- or no-fee accounts aimed at low-income customers; some states require these options.
– Second-chance accounts: designed for customers with past banking problems (overdrafts, returned checks) who need a path back to standard banking.
– Senior checking: reduced fees or added conveniences for older adults.
Checklist — choosing a checking account
– Fees: monthly maintenance, ATM fees, overdraft fees, and foreign transaction fees.
– Fee waivers: conditions to avoid monthly fees (minimum balance, direct deposit amount, linked accounts).
– ATM access: size of in-network ATMs and out-of-network fee policies.
– Mobile and online features: mobile deposits, Zelle/peer payments, bill pay.
– Interest and requirements: APY offered and any conditions (min balance, transaction minimums).
– Branch access: need for in-person services vs. online-only convenience.
– Overdraft policy: whether overdrafts are declined, covered, or opt-in for a service with fees.
– Eligibility documents: IDs and tax ID; for business accounts, proof of business formation.
Step-by-step: how to open a basic personal checking account
1. Compare banks/credit unions using the checklist above.
2. Gather documents: government ID (driver’s license or passport), Social Security number (or taxpayer ID), proof of address, and initial deposit method (cash, check, or electronic).
3. Apply online or in-branch; provide personal information and sign the account agreement.
4. Make the initial deposit and set up direct deposit or linked accounts if desired.
5. Order a debit card and enroll in online/mobile banking and alerts.
Worked numeric examples (two simple illustrations)
1) Monthly-fee waiver example:
– Suppose a checking account charges $12 per month. That equals $144 per year (12 × $12).
– If the account waives the $12 monthly fee when you receive at least $500 in monthly direct deposits, then having $500 direct-deposited each month removes the $144 annual cost.
2) Interest example (illustrates small yields typical of many checking accounts):
– If a checking account pays 0.10% APY and you keep $2,000 in the account, annual interest = $2,000 × 0.001 = $2.
– That shows interest on checking balances is often negligible unless the APY or balance is much larger.
Quick practical tips
– Read the account agreement to know exactly how fees are assessed and what waives them.
– If you use out-of-network ATMs, compare per-withdrawal fees and potential ATM reimbursement policies.
– Check overdraft rules and decide whether to opt in; some banks let you link a savings account or line of credit to cover overdrafts.
– For customers with past account closures or overdrafts, look for certified second-ch
ance checking accounts, which are designed to give consumers with prior banking problems a path back to mainstream accounts.
Types of checking accounts
– Basic (non-interest) checking: No APY (or very small). Often low or no monthly fees if activity or direct deposit requirements are met. Good for everyday spending and frequent debit-card use.
– Interest-bearing checking: Pays APY on balances. APYs are typically much lower than savings or money-market rates. Best if you keep high balances and want liquidity.
– Fee-free or no-minimum checking: Targets customers who prefer simplicity; may offset lower revenue with higher card fees or fewer branches.
– Second-chance checking: For customers with past overdrafts, negative balances, or bank closures; often comes with monthly fees and restrictions for a probationary period.
– Student and youth accounts: Reduced or waived fees for a limited age range.
– Senior accounts: Fee discounts or special services for older adults.
– Business checking: Designed for commercial use; features include more transactions, merchant services, and higher fees/limits.
Key features to compare (checklist)
– Monthly maintenance fee and how it can be waived (direct deposit, minimum balance, number of transactions).
– ATM access: in-network vs out-of-network fees, and whether your bank reimburses ATM fees.
– Overdraft policy: fee amount, whether the bank covers overdrafts automatically, and linked protection options (savings link, line of credit).
– Transaction limits and fees (especially for business accounts).
– Mobile/online features: bill pay, mobile deposit limits, person-to-person transfers.
– Customer service access: branch network, phone, chat, and weekend hours.
– Early direct deposit or same-day ACH timing.
– FDIC insurance: confirmation that the account is FDIC-insured (or NCUA for credit unions) and coverage limits.
Step-by-step: How to determine the true annual cost of a checking account
1. List all fixed recurring fees: monthly maintenance fee, debit card replacement fees, subscription fees.
2. Estimate variable fees: ATM out-of-network fees, per-transaction fees, overdraft fees.
3. Compute annual fixed cost = monthly fee × 12.
4. Estimate annual variable cost = (expected number of events) × (fee per event).
5. Total expected annual cost = annual fixed cost + estimated annual variable cost.
6. If the account offers interest, compute annual interest = average balance × APY.
7. Net annual cost = total expected annual cost − annual interest earned.
Worked example
Assume:
– Monthly fee = $8 (waived with $1,000 direct deposit)
– You plan 12 out-of-network ATM withdrawals/year at $3 each
– No overdrafts expected
– APY = 0.05% and average balance = $1,500
Calculations:
– Annual fixed cost if you don’t meet waiver = $8 × 12 = $96.
– Annual ATM cost = 12 × $3 = $36.
– Annual interest = $1,500 × 0.0005 = $0.75.
– Net annual cost = $96 + $36 − $0.75 = $131.25.
If you set up the direct deposit and waive the monthly fee, net annual cost = $36 − $0.75 = $35.25. That shows how small behavior changes (direct deposit) can materially reduce cost.
Overdrafts — a cautionary numeric example
– Starting balance: $20
– Debit card purchase: $50
– Shortfall: $30
– Typical overdraft fee: $35
– New balance immediately after transaction and fee: $20 − $50 − $35 = −$65
That single mis-timed purchase costs $65 and may trigger additional returned-item or NSF fees if multiple items hit. Consider linking a savings account or small overdraft line of credit to avoid this outcome, or opt out of discretionary overdraft programs if available.
ATM-fee break-even example
Compare two banks:
– Bank A: $0 monthly fee, $3 out-of-network ATM fee, no reimbursements.
– Bank B: $10 monthly fee, reimburses up to $30/month in out-of-network ATM fees.
Let n = number of out-of-network withdrawals per month, average fee $3.
Annual cost Bank A = 12 × 3n = 36n.
Annual cost Bank B = 12×10 + max(0, 36n − 360) − reimbursement cap interaction. Simpler check: If monthly ATM fees exceed $10 (reimbursed up to $30), Bank B becomes cheaper.
Solve for monthly withdrawals where Bank B is better:
Monthly out-of-network cost at Bank A: 3n.
Bank B effectively covers up to $30, so for n≥11 (3×11=33), you’d hit reimbursement cap. For moderate use (say n=6 → $18/month), Bank A costs $216/year and Bank B costs $120/year, so Bank B is cheaper despite the $10 monthly fee.
Practical account-opening checklist
– Bring government ID, Social Security number (or taxpayer ID), and proof of address.
– Ask about minimum opening deposit and whether it’s required to qualify for fee waivers.
– Request fee schedule and written terms for overdrafts and ATM use.
– Verify FDIC/NCUA insurance and ask how beneficiaries are handled (payable-on-death, joint accounts).
– Test mobile deposit limits and transfer timing before relying on them.
Common myths and clarifications
– Myth: “Higher APY always makes a checking account better.” Clarification: Because APYs on checking are usually tiny, account fees and ATM costs often matter more than interest unless balances are large.
– Myth: “All debit-card purchases are covered by overdraft protection by default.” Clarification: Many banks require enrollment; otherwise transactions may be declined or incur NSF fees.
Assumptions and limitations
– Numerical examples assume static fees/APYs; banks change rates and policies.
– Real costs vary by customer behavior (cash use, ATM locations, bill pay habits).
– Legal protections vary by country; examples here assume U.S. banking rules.
Further reading and official resources
– Investopedia — Checking Account: https://www.investopedia.com/terms/c/checkingaccount.asp
– Federal Deposit Insurance Corporation (FDIC) — Consumer Resources: https://www.fdic.gov/consumers/
– Consumer Financial Protection Bureau (CFPB) — Checking & Savings Accounts: https://www.consumerfinance.gov/consumer-tools/banking/
Educational disclaimer
This information is educational and not individualized financial advice. Do your own research and consult a qualified financial professional for decisions about your personal accounts.