Checking Account: A Complete Guide for Beginners

Checking Account: A Complete Guide for Beginners – A checking account is a type of bank account that allows you to deposit and withdraw money easily. It is also called a demand account or a transactional account. You can use a checking account to pay bills, make purchases, transfer money, and more. A checking account is different from a savings account, which is meant for long-term savings and usually earns interest.

In this article, we will explain how a checking account works, what types of checking accounts are available, and what are the benefits and drawbacks of having one.

READ ALSO

How a Checking Account Works

To open a checking account, you need to provide some personal information, such as your name, address, Social Security number, and identification. You also need to deposit some money into the account, either with cash or a check. Some banks may charge a fee if you do not meet their minimum deposit requirement.

Once you have a checking account, you can access your money in various ways:

  • Debit card: A debit card is a plastic card that is linked to your checking account. You can use it to make purchases at stores, online, or over the phone. You can also use it to withdraw cash from ATMs or get cash back at some retailers. When you use your debit card, the money is deducted from your checking account balance immediately.
  • Check: A check is a paper document that you can use to pay someone or something. You need to write the name of the payee, the amount, the date, and your signature on the check. You also need to have enough money in your checking account to cover the check amount. When the payee deposits or cashes the check, the money is transferred from your checking account to theirs.
  • Online banking: Online banking is a service that allows you to access your checking account through a website or an app on your computer or smartphone. You can use online banking to check your balance, view your transactions, transfer money between accounts, pay bills electronically, and more.
  • Mobile banking: Mobile banking is similar to online banking, but it is designed for mobile devices. You can use mobile banking to do most of the things you can do with online banking, such as checking your balance, transferring money, and paying bills. Some banks also offer mobile check deposit, which allows you to take a picture of a check and deposit it into your checking account using your phone.
  • Wire transfer: A wire transfer is an electronic transfer of money from one bank account to another. You can use wire transfers to send or receive money domestically or internationally. Wire transfers are usually faster and more secure than checks, but they may also cost more in fees.

Types of Checking Accounts

There are different types of checking accounts that cater to different needs and preferences. Some of the common types of checking accounts are:

  • Standard checking account: A standard checking account is a basic checking account that offers the essential features, such as debit card, checks, online banking, and mobile banking. A standard checking account may charge monthly fees or have minimum balance requirements, but they may also be waived if you meet certain criteria, such as having direct deposit or using your debit card regularly.
  • Interest-bearing checking account: An interest-bearing checking account is a checking account that pays interest on your balance. The interest rate may vary depending on the bank and the amount of money you have in the account. An interest-bearing checking account may have higher fees or stricter requirements than a standard checking account, but it may also offer more perks, such as free checks or ATM reimbursements.
  • Student checking account: A student checking account is a checking account that is designed for college students. A student checking account may offer lower fees or no fees at all, as well as other benefits, such as free online banking or overdraft protection. A student checking account may require proof of enrollment or graduation date to qualify.
  • Joint checking account: A joint checking account is a checking account that is shared by two or more people, usually spouses or family members. A joint checking account allows all the owners to deposit and withdraw money from the same account. A joint checking account may make it easier to manage household finances or save for common goals.
  • Second chance checking account: A second chance checking account is a checking account that is designed for people who have bad credit or banking history. If you have bounced checks, overdrafts, unpaid fees, or other negative marks on your record, you may have trouble opening a regular checking account. A second chance checking account may give you another opportunity to rebuild your reputation and improve your financial habits. However, a second chance checking account may also have more restrictions and higher fees than a regular checking account.

How to Choose the Best Checking Account for You

Choosing the best checking account for you depends on your personal preferences, needs, and goals. There are many factors to consider when comparing different checking accounts, such as:

Fees

Checking accounts may charge various fees, such as monthly maintenance fees, overdraft fees, ATM fees, wire transfer fees, check order fees, and more. These fees can reduce your balance and eat into your earnings. You should look for a checking account that has low or no fees, or that offers ways to waive or avoid them. For example, some banks may waive the monthly fee if you maintain a minimum balance, set up direct deposit, or use your debit card a certain number of times per month.

Interest rates

Checking accounts may pay interest on your balance, which can help you grow your money over time. Interest rates may vary depending on the bank, the account type, and the balance amount. You should compare the annual percentage yield (APY) of different checking accounts to see how much interest you can earn. APY is the effective annual rate of return that takes into account the interest rate and the frequency of compounding. The higher the APY, the more interest you can earn.

Rewards

Checking accounts may offer rewards or perks that can benefit you in different ways. For example, some checking accounts may offer cash back on your debit card purchases, which can save you money. Some checking accounts may offer other benefits, such as free checks, ATM fee reimbursements, discounts on loans or mortgages, financial guidance, and more. You should consider what rewards or perks are most valuable to you and how often you can use them.

Accessibility

Checking accounts may offer different ways to access and manage your money. For example, some checking accounts may provide online banking and mobile banking features that allow you to check your balance, view your transactions, transfer money, pay bills, deposit checks, and more from anywhere and anytime. Some checking accounts may also have a large network of branches and ATMs that you can use for free or at a low cost. You should consider how convenient and easy it is to use your checking account and what options are available to you.

Eligibility

Checking accounts may have different eligibility requirements that you need to meet to open an account. For example, some checking accounts may require a minimum opening deposit or a minimum balance to avoid fees. Some checking accounts may also have membership requirements that you need to fulfill to join a bank or a credit union. For example, you may need to live in a certain area, work for a certain employer, belong to a certain group, or make a donation to a certain organization. You should check the eligibility criteria of different checking accounts and see if you qualify.

To choose the best checking account for you, you should compare different options based on these factors and weigh their pros and cons. You can use online tools or reviews to find and evaluate different checking accounts. You can also visit or call different banks or credit unions and ask questions about their checking accounts.

How to Open a Checking Account

Opening a checking account is a simple process that can be done online or in person. Here are the steps to follow:

  1. Choose a bank or credit union. Compare different types of checking accounts and their features, such as fees, interest rates, rewards, perks, and limits. You can use online tools or reviews to find the best checking account for you. You can also consider factors such as customer service, branch locations, ATM networks, and online banking options.
  2. Gather your important information. You will need to provide some personal information and documents to open a checking account, such as:
    • Your name, address, phone number, and email address
    • Your Social Security number or individual taxpayer identification number
    • A valid government-issued ID, such as a driver’s license, passport, or state ID card
    • Proof of address, such as a lease agreement, utility bill, bank statement, or credit card statement
    • Your opening deposit amount and method, such as cash, check, debit card, or ACH transfer
  3. Fill out an application online or in person. You can visit the bank’s website or app and follow the instructions to open a checking account online. You will need to enter your personal information, choose your account type and features, agree to the terms and conditions, and verify your identity. Alternatively, you can visit a bank branch or call a bank representative and fill out an application with their assistance.
  4. Pay your opening deposit (if required). Some checking accounts may require a minimum opening deposit to activate your account. You can pay this deposit with cash, check, debit card, or ACH transfer from another bank account. Some banks may waive the opening deposit requirement if you set up direct deposit or meet other criteria.
  5. Start using your checking account. Once your application is approved and your deposit is processed, you can start using your checking account. You will receive a debit card and checks (if applicable) in the mail within a few days. You can also set up online banking and mobile banking to access your account anytime and anywhere.

How to Avoid Checking Account Fees and Mistakes

Checking account fees and mistakes can cost you money and cause you stress. However, many of them are also preventable if you follow some simple tips and strategies. Here are some ways to avoid checking account fees and mistakes:

Switch to a no-fee checking account

The best way to avoid checking account fees is to open an account that does not charge any fees in the first place. There are many no-fee checking accounts available from online banks, credit unions, and neobanks that offer benefits such as no minimum balance requirement, no monthly maintenance fee, no overdraft fee, and unlimited ATM reimbursements. You can compare different no-fee checking accounts and find the one that suits your needs best.

Meet the minimum balance requirement

If you have a checking account that charges a monthly fee, you may be able to waive it by maintaining a certain balance in your account. For example, the Chase Total Checking® account charges a $12 monthly fee, but you can avoid it by having a minimum $1,500 balance at the beginning of each day. You should check the minimum balance requirement of your checking account and make sure you meet it every month.

Don’t overdraw your account

If you spend more than the amount in your account, resulting in a negative balance, you may incur an overdraft fee or a non-sufficient funds (NSF) fee. These fees can be up to $35 per occurrence and can add up quickly. To avoid overdrawing your account, you should check your balance frequently, set up low-balance alerts, live on a budget, and enroll in overdraft protection. Overdraft protection links your checking account to another bank account or a line of credit and transfers money to cover overdrafts. You may pay a fee for this service, but it is usually cheaper than paying an overdraft fee or an NSF fee.

Open a savings account at the same bank

Opening a savings account at the same bank where you have your checking account can help you avoid some fees and mistakes. For example, you can use your savings account as a backup for overdraft protection, which may reduce or eliminate the transfer fee. You can also transfer money between your checking and savings accounts more easily and quickly, which can help you avoid low-balance or overdraft situations. Additionally, having both accounts at the same bank may qualify you for some perks or discounts, such as waived fees or higher interest rates.

Enroll in direct deposit

Direct deposit is a service that allows your employer or other payer to deposit your paycheck or other income directly into your bank account electronically. Enrolling in direct deposit can help you avoid some fees and mistakes associated with your checking account. For example, direct deposit can help you avoid check-cashing fees, paper statement fees, or late payment fees. It can also help you avoid losing or damaging your check, waiting for it to clear, or forgetting to deposit it on time.

Use your debit card more often

Using your debit card instead of cash or checks can help you avoid some fees and mistakes related to your checking account. For example, using your debit card can help you avoid ATM fees, check order fees, or check-cashing fees. It can also help you avoid losing or misplacing your cash or checks, bouncing checks, or making errors when writing checks.

Set low balance alerts

Low balance alerts are notifications that your bank sends you when your checking account balance falls below a certain amount that you set. Setting low balance alerts can help you avoid some fees and mistakes related to your checking account. For example, low balance alerts can help you avoid overdraft fees, NSF fees, or monthly service fees by reminding you to deposit more money into your account or reduce your spending.

Live on a budget

Living on a budget is a good habit that can help you avoid many fees and mistakes related to your checking account and your overall finances. A budget is a plan that shows how much money you earn and how much money you spend on different categories each month. Living on a budget can help you avoid overdrawing your account, spending more than you earn, missing payments, accumulating debt, and more.

How to Switch or Close a Checking Account

Switching or closing a checking account may seem like a hassle, but it can be done smoothly if you follow some steps and plan ahead. Here are some tips on how to switch or close a checking account:

Open your new checking account

Before you close your current checking account, you should first open a new one. Compare different checking accounts and choose the one that meets your needs and preferences. You can open a new checking account online or in person at a bank or credit union. You will need to provide some personal information and documents, such as your name, address, Social Security number, identification, and opening deposit. Some banks may also run a credit check or a ChexSystems report to verify your banking history.

Switch your automatic deposits and payments

If you have any automatic deposits or payments linked to your old checking account, such as direct deposit, bill pay, subscriptions, or transfers, you should switch them to your new checking account as soon as possible. This will prevent any missed payments, late fees, or overdrafts on your old account. You can use online banking or mobile banking tools to switch your automatic deposits and payments, or you can contact the payers or payees directly. You may need to provide them with your new account number and routing number.

Leave enough money in your old account

While you are switching your automatic deposits and payments, you should leave enough money in your old checking account to cover any pending transactions or fees. You should also stop using your old debit card or checks and start using your new ones. You can check your old account balance and transaction history online or by calling your bank to make sure everything has cleared before you close the account.

Close your old checking account

Once you have switched all your automatic deposits and payments and cleared all your transactions and fees, you can close your old checking account. You can close the account by calling, visiting, writing, or submitting a request online to your bank, depending on their options. You should have proper identification and personal information ready. You may also need to pay an account closing fee or an early closure fee if you close the account within a certain period of opening it. If you have a joint account, you can close it without the other person’s permission, but it might be courteous to inform them.

Withdraw or transfer any remaining balance

After you close your old checking account, you should withdraw or transfer any remaining balance in the account. You can do this by using an ATM, writing a check to yourself, requesting a cashier’s check or money order, or setting up an external bank transfer. You should also destroy any unused checks and debit cards from your old account to prevent identity theft or fraud.

Get a confirmation letter

Finally, you should get a confirmation letter from your bank that states that your old checking account has been closed and that there is no balance or activity on the account. You should keep this letter for your records in case there is any dispute or error in the future.

Benefits and Drawbacks of Having a Checking Account

Having a checking account can offer several benefits:

  • Convenience: A checking account makes it easy to access and manage your money. You can use your debit card, check, online banking, or mobile banking to pay bills, make purchases, transfer money, and more. You can also deposit and withdraw money from ATMs or bank branches.
  • Security: A checking account is safer than carrying cash or storing it at home. Your money is protected by the bank and insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per bank. If your debit card or check is lost or stolen, you can report it to the bank and limit your liability for unauthorized transactions.
  • Record-keeping: A checking account provides you with a record of your transactions and balances. You can use your bank statements, online banking, or mobile banking to track your income and expenses, budget your money, and plan your financial goals.

However, having a checking account can also have some drawbacks:

  • Fees: A checking account may charge various fees, such as monthly maintenance fees, overdraft fees, ATM fees, wire transfer fees, check order fees, and more. These fees can add up and reduce your balance over time. You can avoid or minimize some of these fees by choosing a low-fee or no-fee checking account, maintaining a minimum balance, opting out of overdraft protection, using in-network ATMs, or comparing different banks and their fee schedules.
  • Interest: A checking account typically does not pay much interest, if any, on your balance. If you want to earn more interest on your money, you may consider opening a savings account or another type of interest-bearing account. However, you may also have to pay taxes on the interest you earn.
  • Limits: A checking account may have some limits on how much money you can deposit or withdraw at a time. For example, some banks may limit how much cash you can deposit or withdraw from an ATM per day or per transaction. Some banks may also limit how much money you can transfer online or by wire per day or per month. These limits are meant to prevent fraud and protect your account, but they may also inconvenience you if you need to move large amounts of money.

In conclusion, A checking account is a useful tool for managing your money and paying for your expenses. It offers convenience, security, and record-keeping benefits. However, it may also charge fees, pay low interest, and have limits. Therefore, before opening a checking account, you should compare different types of checking accounts and different banks to find the one that suits your needs and preferences best.