What Is a Checking Account? Here's Everything You Need To Know

What Is a Checking Account?

A checking account is a bank account where you can make cash withdrawals or deposits. You can also use a checking account for electronic transfers or online or in-person purchases. Generally, checking accounts cover everyday expenses, such as rent, utility, and medical bills.

How Checking Accounts Work 

A checking account is also known as a “share draft account” at a credit union. These accounts serve your short-term cash needs as you deposit and withdraw money. You add money via paychecks, cash gifts, transfers, or direct deposit. You take money out using checks, electronic transfers, at an ATM, or using a debit card for in-person or online purchases. You can generally set up automatic bill payments through your checking account.

Checking Account Insurance

If you open a checking account at a bank, the Federal Deposit Insurance Corporation (FDIC) insures your money up to $250,000 per individual depositor and insured bank. If your bank fails, your money should be safe if your account balance isn’t more than the FDIC limits. If you open a checking account at a credit union, your money will get the same kind of protection from the National Credit Union Association.

Checking Account Interest 

Unlike savings accounts, checking accounts generally don’t pay interest. And if they do pay interest, the rate tends to be low, even in a high-rate environment. In January 2024, the average savings account rate is roughly four times more than the average rate for an interest-bearing checking account.

Checking Account Rewards and Bonuses

While checking accounts may not offer interest, many banks and credit unions provide cash-back debit cards. When you pay for an item with your debit card, you can earn back a percentage of the amount spent. You can also earn a new customer bank account bonus of several hundred dollars if you meet certain conditions, typically requiring direct deposits.  

Checking Account Fees

Banks make money by charging fees for checking accounts, including maintenance fees or using an ATM outside the bank’s network. You may be able to avoid some fees. For example, a bank might not charge a maintenance fee if you make a certain number or amount of direct deposits.

Types of Checking Accounts

Checking accounts come in several varieties. 

Traditional Checking Accounts

A regular checking account typically pays little or no interest, although some offer a flat interest rate regardless of your balances. Others pay more interest on higher balances. Some traditional accounts don’t charge recurring fees, such as monthly maintenance fees. But they may require a minimum balance to avoid fees.

Premium Checking Accounts

If you have a lot of cash to stash in a checking account or need personal banking services, check out a premium checking account. With a high balance, you can avoid fees and enjoy perks such as ATM fee reimbursements and higher interest earnings.

Joint Checking Account

A joint checking account allows two or more people, often spouses, to write checks and make deposits. The ownership of a joint account may depend on the institution, state law, and how you set up the account. Ensure you understand what happens to the money in a joint account if an account holder dies or a divorce or separation occurs. You may be legally responsible for your joint owner’s debts. Joint owners may benefit from higher FDIC insurance amounts. 

Business Checking Accounts

Business accounts may be offered to small business owners and larger or global commercial entities. Authorized business officers, managers, and employees can use a business checking account to cover expenses. A business account can only be opened by a legitimate business, and you may need to provide documentation to the bank regarding your business.  

Student Checking Accounts

Some banks offer student checking accounts for high school students and college students. These accounts feature perks such as low or no maintenance fees and no minimum balance requirements. High school student accounts typically require parent involvement as a co-owner or co-applicant, while those for college students do not.

Low-Balance Checking Accounts

Sometimes known as “lifeline accounts,” these accounts are designed for customers who can only maintain a small balance but still want access to banking services. But, the bank might limit the number of checks you can write or require paperless statements.

Second-Chance Checking Accounts

If a bank previously shut down your checking account, you might need to get a second-chance account. Keep an eye on potential fees and rules around keeping your account balance positive.

Senior Checking Accounts

Some banks offer checking accounts geared toward seniors over a specified age. The benefits of these accounts include no fees and discounts on banking products and services.

Checking Account Overdraft Fees 

If you purchase something that costs more than your checking account’s contents, your bank might cover the difference through overdraft protection. But it will charge you a fee to do so. Overdraft coverage is technically considered a type of loan with pros and cons.

For example, if you have $50 in your checking account and buy a shirt for $70 using your debit card, the bank might approve the purchase transaction. However, the bank might charge a $20 overdraft fee for that purchase or any other purchases until you add money to your account. If your account remains overdrawn, your bank also might charge daily interest.

You can avoid overdraft charges in several ways: 

• Selecting a checking account with no overdraft fees
• Setting up balance alerts to notify you when your checking account balance is low
• Linking another account to your checking account to cover overdrafts may also lead to fees
• Opting out of overdraft coverage

Checking Account Services 

Here are the various services that likely accompany your checking account. 

Direct Deposit 

Direct deposit lets your employer electronically deposit money into your bank account. This gives you quicker access to money than receiving and depositing a paper check. Banks also benefit from direct deposits due to the steady inflow of cash. So, many banks provide benefits like free checking if you set up direct deposit for your account.

Wire Transfer

A wire transfer is an electronic funds transfer that moves money from one bank account directly into another account, even internationally. It allows money to be moved securely without the need to exchange cash.

ATMs 

ATMs let you easily access cash or make check or cash deposits. These machines can be found at branches, malls, airports, and convenience stores. Before using an ATM, understand the fees your bank charges for using an out-of-network ATM.

Debit Cards 

Debit cards provide a convenient way to shop, as they’re accepted similarly to credit cards. Debit cards draw from the funds in your bank account, but you can also use the cards to withdraw cash at an ATM. Many banks offer zero-liability fraud protection to help guard against identity theft if your debit card is lost or stolen.

Bill Pay

You can schedule or make automatic payments for usual utility and rent bills. You can even pay another person electronically or with a bank-mailed paper check, often at no cost. 

Checking Accounts and Interest 

Checking accounts usually pay lower interest rates than savings accounts if they pay any interest.

Some "high yield” checking accounts offer higher interest rates than the average. Interest rates on high-yield checking accounts might be three to six times higher than the rates that a regular checking account pays.

Checking Accounts and Credit Scores 

Most basic checking account activities—such as making deposits, making withdrawals and writing checks—don’t affect your credit score. Closing checking accounts in good standing also won’t impact your credit score.

However, overdrawn checking accounts may appear on your credit report if you don’t repay the money you overspent. Your bank could send that item to collections if you don’t repay an overdraft loan. This could potentially harm your credit score.

How to Choose a Checking Account

Consider these factors when choosing a checking account:

• Fees: Review monthly maintenance fees, overdraft fees or any other bank fees.
• Requirements: Find out whether you must make a minimum deposit, maintain a minimum balance or meet other requirements to open the checking account.
• Account access: Ensure the bank operates branches where you can do in-person business and that the bank’s website and mobile app are user-friendly.
• ATM access: Make sure you can access a broad network of fee-free ATMs or get reimbursed for fees when using an ATM outside its network.
• Interest: Learn the interest rate on money kept in your checking account.
• Reputation: Research the bank’s reputation for customer service and financial stability. Check sources like J.D. Power (customer service rankings) and FDIC (measurements of financial strength) to get a sense.
• Insurance: Make sure your deposits are FDIC- or NCUA-insured. 

How to Open a Checking Account

Setting up a checking account at a bank or credit union is generally easy. The directions for opening a checking account differ from one financial institution to another. Generally, here’s what you can expect if you open an account in person or apply online:

1. Choose the bank where you want to do business. Be sure to compare account fees, requirements and other factors before picking a financial institution, whether a traditional bank, credit union or online-only bank.
2. Prove your identity. You must provide a valid government-issued ID or Social Security card to verify your identity.
3. Provide proof of your residential address. For example, this may be a bank statement, credit card statement, or pay stub.
4. Make an initial deposit. To open the account, you need to make a minimum deposit to open the account. You can deposit money via a debit card, electronic transfer, or cash.
5. Submit your application. You’ll almost certainly need to fill out and submit an account application.

Being Denied a Checking Account

Banks and credit unions review your credit report and checking account report before approving a new account application. The bank might reject your application if you’ve racked up a history of writing bad checks. Negative information typically stays on your report for up to five years.

Repeatedly bouncing checks, failing to pay overdraft fees, committing fraud, or having an account “closed for cause” can result in a financial institution turning down your application for a checking account.

If a bank has closed your checking account or you can't qualify for a new one, you might turn to second-chance checking accounts, which many financial institutions offer. After maintaining the account in good standing for a certain period, you can graduate from a traditional checking account.

The Bottom Line 

A checking account can be ideal for keeping your money to meet short-term deposit and spending needs. You can open a checking account at a traditional bank, credit union, or online-only bank. When you’re shopping for a checking account, be sure to review an account’s fees, benefits, and interest rates.