A Guide to Checking Accounts
Checking accounts have certainly evolved in the last 20 years. In the pre-internet days, a checking account got you a box of checks and deposit slips. You could make deposits in person, via mail, direct deposit or cash machine. You probably had to pay a fee each month for the account. While everything is still standard with today’s checking accounts, modern accounts have many new features to make banking more convenient.
Checking Account Basics
Financial institutions such as banks, credit unions and brokerages offer checking accounts. These are demand accounts (you can get your money on demand) that allow deposits and withdrawals. Unlike savings accounts, checking accounts allow you to write an unlimited number of checks each month and make unlimited deposits.
Specialized checking accounts exist in several forms, including business, individual, joint and student accounts, each with some unique features. Checking accounts might be free of charge, have monthly or usage fees, and/or earn interest on deposits. If held at a chartered banking institution, checking accounts are insured by the Federal Deposit Insurance Corporation for up to $250,000 per individual per bank.
Almost all checking accounts offer account owners a free debit card. A debit card looks like a credit card, but is very different. You can use a debit card to make purchases just as you can with a credit card, but the debit card immediately draws money from your checking account. It’s like a real-time check.
While you usually must sign a receipt when using a credit card, many debit cards allow you to enter a four-digit PIN instead. That’s a good security feature, because if someone steals or finds your debit card, they won’t be able to use it without using the PIN. Debit cards also work at ATM machines to deposit, withdraw and transfer cash.
Typically, there aren’t fees for debit card usage, and overdrafts can be rejected if you so choose. Spending with a debit card uses money you already have, so it doesn’t cause you to rack up any debt. Psychologically, knowing you’re spending your own money with a debit card might just help you avoid impulsive purchases.
Checking Account Access
Almost all checking account providers offer mobile checking via a smartphone/tablet app. The app allows you to make purchases just like you would with a debit card, but uses electronic communications instead of a physical card. You can use the app at any time to check your balance, move money around, review previous transactions, and perform many other banking functions in real time.
Many apps feature electronic check deposit, in which you use your phone to photograph a check and then transmit the image to the account for deposit. Many of these same features are available for PCs and laptops on the bank’s website. Phone banking lets you perform some basic functions over the phone using the touchpad or verbal instructions. The latest way to access your checking account is via wearables, such as a smart watch. These devices offer somewhat limited functionality.
Modern Checking Account Features
Today’s checking accounts come with plenty of bells and whistles:
No minimum balance: many checking accounts are free and require no minimum balance. Most credit union checking accounts fall under this category. It’s a good idea to check out the fees and minimum balances before you open a new checking account
Pay bill online: this feature lets you receive e-bills and pay bills online, often at no extra charge. You can set up recurring fixed payments for items like your mortgage or rent, HOA fees, insurance premiums and so forth. The account sends out your recurring payments automatically on the schedule you set, freeing you from writing and mailing checks, or even remembering to pay the bill
Overdraft protection: most checking accounts let you link a savings account or a credit account to avoid overdrafts. If you overspend your checking account, the secondary accounts transfer enough money to avoid the overdraft. This feature might charge a fee. You can set up your checking account to disallow any spending that would create an overdraft. Also, many banks offer sophisticated cash-flow forecasts that warn you when your account balance is about to run low
Budgeting: some banks offer extra features such as online budgeting that allows you to set up spending budgets and tracks the cash flows into and out of your account. You can check your actual spending against your budget online and in real time
Free ATMs: you bank might belong to an ATM alliance that allows you to use an ATM in the alliance’s network for free. This can save you more than $2 per transaction compared to out-of-network ATM usage
Fraud protection: banks and credit unions are getting more sophisticated in their efforts to fight fraud, especially on mobile banking apps. The last thing you want is for someone to steal your phone and empty out your checking account. Mobile apps offer several protections. Two-factor authentication requires you to receive and enter a temporary code via text message or email before you can access the app. Biometric identification scans your thumb or face to recognize your access to the account
Automatic sweep: some checking accounts automatically sweep excess cash from your checking account to a savings or brokerage account. You can set the rules for when the sweep should occur, but some accounts use artificial intelligence to run sweeps based on your established spending patterns. This way, you can earn interest on funds that would otherwise be sitting idle. In one variation, your debit card or mobile banking purchases are rounded up to the next dollar and the extra amount is deposited into your savings account
Subaccounts: this feature lets you set up special purpose subaccounts that allow you to earmark savings for purchases or events, such as a new car or a dream vacation. Of course, you can use the money in the subaccounts for any reason, but it’s a valuable feature if you have a specific savings goal in mind. Using subaccounts can help you avoid using your credit card for big-ticket purchases
Rewards: checking account providers want your business and will reward you to get it. Look for cash bonuses when you open an account and perform some activity, such as receiving $2,500 in direct deposits within the first two months, maintaining a large balance or completing a set number of qualifying transactions. Bonuses typically run as high as $300