If you need a deposit account with full access to your funds to meet your daily transactions, open a checking account. With a checking account, you can make unlimited withdrawals, deposits, and transfers without paying a fee. This makes checking accounts great for your day-to-day transaction activities. Easy access to your cash, however, means you don’t earn interest on your savings, which is one of the disadvantages of checking accounts.
You can open a checking account from your local bank or credit union. Some banks require an initial deposit, which varies from one bank to another but is usually between $25 and $100. When you open a new account, you get a debit card and checks to help you make payments.
In this post, I will cover the basics of a checking account, its pros and cons, and how it compares with a savings account.
What is a checking account?
A checking account, or a transaction account, is a deposit account that allows you to make daily transactions, including depositing money, making transfers, and withdrawing cash from the account. A checking account is easy to set up and suitable for daily transactions, and you can quickly open one from your local bank or credit union.
Another deposit account usually confused with a checking account is a savings account. While you can open both deposit accounts from your local bank, savings accounts come with limited access to your cash and are only intended for saving money.
According to Bankrate, the federal government requires a savings account to have no more than six monthly deposits or withdrawals.
Due to these limitations, making daily transactions with a savings account is not a good idea. You might violate the withdrawal limits and compromise your saving goals. The best course of action is to transfer the money from your savings account to a checking account before you use it.
Checking account maintenance fee
Some banks charge a maintenance fee if you don’t have enough money in the account or don’t make qualifying monthly deposits.
For example, here are some tips and requirements for avoiding $10 maintenance fees on your Wells Fargo checking account.
- You must maintain a minimum daily balance of $500.
- Make a qualifying deposit of at least $500 each month.
- The primary account owner is between 17-24 years old.
- Make a qualifying non-civilian military direct deposit with the Wells Fargo Worldwide Military Banking Program.
What can you do with a checking account?
Your checking account is used for daily transactions (buying and selling goods and services). It is easy to use and has fewer restrictions. You can quickly transfer money in and out of a checking account.
For example, an employer can directly deposit money into your checking account without using a physical check. , and you can often provide your checking account for direct deposit. You can also receive a check and deposit it into your account using an ATM or scanning it.
At the same time, you can write a check to someone, and funds will come out of your account when it is cashed. A checking account is also great for shopping online or paying bills like rent, utility, online subscriptions, etc.
In short, a checking account is an account that can be used on many forms of transactions with fewer restrictions. You can make purchases, withdraw money, and make transfers on the same day with your checking account.
Ways to deposit money in a checking account
Depositing money into your checking account is a great strategy to avoid overdraft charges and account maintenance fees. Having enough money in a checking account also means you don’t have to carry too much cash, which can easily be stolen or lost.
Here is a list of ways to deposit money into your checking account.
- Direct deposit. For example, your paycheck can be directly deposited into your checking account from your employer.
- Automated Teller Machine (ATM). You can use an ATM to deposit cash or a check in your checking account.
- Electronic Funds Transfer (EFT). With this method, the money can be transferred into your account. For example, you can transfer money from your brokerage account directly into your bank account without paying a fee. Sometimes, it may take a few business days for the funds to arrive in your account. Funds can also be transferred from one checking account on one bank to another account with another bank.
- Scanning checks. With the advancement of mobile banking technology, most banks have developed apps that allow you to deposit a check by scanning it with your phone. You no longer need to go to an ATM to deposit a check.
Benefits of checking accounts
Having a checking account is essential in your financial planning strategies. It can help you organize your finances and make money flow between accounts seamlessly and efficiently. Here are the benefits of checking accounts.
- It is easy to create a checking account
- There are many ways you can deposit money into a checking account
- Checking accounts have no restrictions on how many transactions you can make in a month
- Checking accounts are liquid, meaning the funds are always ready to use. However, if you want funds from your account in physical money, you must withdraw at an ATM or visit your local branch.
- There are chances of earning a small interest depending on the institution and the checking account you have
- You can transfer money from a checking account to another account.
- Checking accounts are outstanding for paying rent, utility bills, etc.
Disadvantages of checking accounts
While a checking account has many benefits, it also has cons you should be aware of. The following are the cons of having a checking account.
- You will pay penalties for overdrafts. An overdraft is when you buy something worth more than the money in your account using a card, writing a check, etc. When this happens, the bank lends you the difference and charges you. You could be charged for every transaction you made during the overdraft period, and fees will depend on the bank you use. Also, your bank can apply charges to your account every day if your account is still overdrawn.
- Overspending temptations. Since the account is liquid, it is easy to be tempted to spend the funds quickly.
- You can be charged if you violate the terms of an interest-bearing checking account. Usually, investors do not make money from checking accounts. However, there are exceptional checking accounts that give interest to account holders. You could be required to have a minimum amount in the account. Should you go below the amount needed in your account? You will pay charges for dropping below the acceptable limit.
- Inflation risks. Checking accounts do not earn interest by default. Therefore, keeping a large amount of money in a checking account is not a good idea due to inflation.
Checking account vs. savings account
A checking account and a savings account are essential in your financial planning. The savings account helps you save money for short-term and long-term goals, while the checking account lets you finance your daily transactions.
Here is how a checking account differs from a checking account.
| Checking account | Saving account |
| Suitable for daily spending, money transfers, and bill payments | Ideal for emergency funds and saving goals. |
| Usually, it does not pay interest | Pays interest. To maximize it, open a HYSA |
| Comes with a debit card | Sometimes, it does not come with a debit card |
| Insured by FDIC or NCUA up to $250,000 | Insured by FDIC or NCUA up to $250,000 |
| Easy access to your funds with no restrictions | Usually, it allows six withdrawals and deposits per month. |
| It comes with ATM access | Varies by institution |
Does FDIC insure my checking account?
Yes. The Federal Deposit Insurance Corporation(FDIC) insures checking accounts. However, your bank must be insured by the FDIC to get coverage. In other words, your savings are insured only when you open an account with an FDIC-insured bank. For credit unions, your savings are insured by the National Credit Union Administration (NCUA). FDIC and NCUA insure your checking accounts up to $250,000 per depositor, institution, and account category.
- Other accounts insured by FIDC include:
- Savings accounts
- Money orders
- Cashier’s checks
- Negotiable order of withdrawal (NOW) accounts
How much money should you keep in a checking account?
Generally, your money in a checking account does not earn interest. For this reason, you should maintain only what you need to meet your day-to-day transactions, such as paying bills, buying food, etc. An ideal amount to keep in a checking account is one to two months of expenses. This allows you to cover all your bills without touching your emergency funds or liquidating your investments at a loss to pay bills.
