What is a Checking Account?
A Quick and Thorough Guide to Checking Accounts
A checking account is a financial service provided by banks, lending firms, credit unions, and savings and loans companies. They are designed to allow for quick withdrawal and depositing of funds with a minimum of expense. Checking accounts are centered on the use of checks, which are essentially a substitute for cash funds. Checks can be used to conveniently pay for merchandise, bills, debts, etc. Checking accounts may also be used for some of the following payment methods if they are included in the account: giro funds transfer and direct deposit, pre-authorized debiting, automatic funds transfers, ATM cards, debit cards, SWIFT transfers, money orders, traveler’s checks, and cash. Checking accounts are also called transactional accounts, or current accounts in certain countries.
Checking accounts sometimes charge for account services or provide interest rate yields based on the account balance. You can read more about this in the Cost and Interest section below. Checking accounts often include convenient features such as a debit card, ATM withdrawals, internet and phone checking and account statements, and 24-hour service.
To use a check, the checking account holder writes out the monetary amount (in both decimal and word form) and purpose of the transaction on the check and then signs their name to it. This signature is a guarantee that the funds will be paid in full and on time. Checks may be post-dated to only allow payment after a certain date. Checks are usually only acceptable for about one month after the post-date or creation date, after which their validity may come into question as a matter of security. The check can be cashed by the recipient at most banks and some stores or be used to directly deposit the funds into a bank account. The check recipient must sign their name on the back of the check. The check is then entered into an electronic system for verification and the transfer of the funds. The money is taken out on credit from the bank and then repaid once the electronic transfer has been completed. In general, the Federal Reserve guarantees payment to check cashing services. Depending on where the check is cashed, verification and transfer completion may be required before payment.
ATM cards and debit cards function in close to the same way as checks, but require a pin number or signature in addition to an electronic card for verification purposes. ATM cards can be used primarily for quick cash withdrawals at ATM machines. Debit cards can be used for convenient online purchasing much like a credit card. Each checking account also has a unique number: the account number. This number is printed on each check, together with a routing number, to facilitate check processing. These two numbers can also be used to electronically withdraw funds from a checking account to pay a bill (a so-called eCheck).
Before opening a checking account it is recommended that you determine which type of checking account fits your budget, spending pattern, and lifestyle best. You should take into account such factors as cost, interest rate, rewards programs, services provided, and balance limit. To sign up for a checking account, visit a banking service office and inquire about opening a checking account. After filling out a few official forms, a checking account can generally be opened almost immediately. Many banks require a checking account holder to be 18 years old. Some do not, and others will allow a parent/guardian to co-sign for the account allowing someone less than 18 to have a checking account.
Checks are provided with the creation of the account. It is recommended that you keep close track of your checking account funds and checks written. This helps to prevent overdraft (withdrawing more money from the account than is currently available) and false checks. Some banks have hefty fees for overdraft, while others offer an optional feature called “overdraft protection” which will prevent overdraft fees from being incurred.
Payment of a check may be stopped at any time before it is cashed by speaking with a bank representative and ordering a stop payment action. If a check has already been cashed, you may make a refund claim, subject to the bank’s approval.
Cost and Interest
Checking accounts may vary greatly in their terms and services. Always make sure you are well informed when it comes to your account. Here are some standard policies that many banks employ:
Your checking account may receive an interest rate yield according to the funds present in the account. This is usually applied annually. The exact percentage depends entirely on the bank and the type of account, but is generally 1% or less. High-Interest and Rewards accounts may offer higher rates (see below). Savings accounts are a different type of bank account that tends to have less flexibility in terms of withdrawal options, but higher interest rates. Some checking accounts do not offer an interest rate yield.
Financial transaction fees may be applied to checking accounts in several ways. A small fee (usually under $1) may be applied for every check, ATM, and debit card use. A larger monthly fee may be applied to cover all transactions, sometimes with a transaction limit. Elderly, low-income, student, and youth customers are sometimes exempt from these fees, depending on state and national laws. Certain countries may not charge any financial transaction fees whatsoever for checking accounts, but this is usually balanced with high interest rates on loans.
Overdraft fees are applied when you write a check for an amount that is greater than your current account balance. This fee may scale according to the amount overdrawn, but is generally quite expensive. The best way to avoid overdraft fees is to keep careful track of the funds in your checking account and only write checks for amounts that you possess. If you have an overdraft account, this fee may be avoided (see below).
Types of Checking Accounts
Standard checking accounts offer basic financial services. The exact services offered vary according to the providing bank.
Lifeline checking accounts have reduced costs for the benefit of elderly, low-income, or student customers. You must fit the specified requirements to qualify for a lifeline checking account. This type of account is not always available, depending on state and national law.
Internet/telephone enabled checking accounts allow for review of bank statements online or via banking service numbers (usually an automated system or call center). These services may also be used for easy access to other banking services. Most checking accounts include internet and/or phone services for customer convenience.
Overdraft checking accounts provide a credit safety net for overdrafts made on the account. If the account holder makes a withdrawal that is larger than his current account balance, they will not be immediately charged an overdraft fee. Instead the overdraft credit amount can be used to pay the overdrawn amount, with interest. If the overdrawn amount is more than the total of the overdraft credit amount and the remaining balance, then the account holder will still be charged with the full overdraft fee.
High-Interest NOW accounts are special checking accounts that have especially high interest rates. They also have a maximum funds balance limit. These checking accounts are designed to attract new customers to the bank for other services while still limiting the high cost of the increased interest rates.
Reward Checking accounts provide special incentives to account-holders who carry out certain actions with their account each month. Some examples of these actions are: direct bank deposits, bill pays, a certain quota of debit card uses (around 8 to 10), and use of online banking statement services. These rewards are usually in the form of a bonus to their interest rate yields over the normal amount for any months that they fulfill the requirements.
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