What is a Checking Account?
Everybody needs a checking account in the USA, and everybody needs a chequing account in Canada. Regardless of how you spell it, checking accounts are a foundational financial product. They act as the headquarters of your financial portfolio, thus making it very important to understand how it works in its entirety.
In this Wealth Rocket article, we’ll answer the seemingly-obvious-but-not quite-clear-question: What is a checking account? We’ll also look at how to choose, use, and avoid misusing one.
You’ll also learn that just because it’s a spending product doesn’t mean it can’t save you any money!
Table of Contents
What is a Checking Account?
A checking account is a bank account dedicated to making monetary transactions that usually involve spending.
Checking accounts are not savings accounts and do not typically offer interest (though more interest-bearing checking accounts are becoming available).
Checking accounts facilitate point-of-sale purchases, bill payments, money transfers, and more.
Money in a checking account is considered liquid, which denotes the funds can easily become cash.
Savings and investing are suitable for keeping money for extended periods and are not suitable for spending.
How does a Checking Account work?
A checking account is a financial tool that facilitates monetary transactions and is made available through financial institutions, primarily banks, digital banks, and credit unions.
Transactions include the movement of money outside of the checking account, including point-of-sale transactions, bill payments, electronic fund transfers, and moving funds from a chequing account into another account. They also include cash withdrawals.
Checking accounts can come with a monthly fee and a transaction cap each month. However, free bank accounts with unlimited usage are also available, typically, but not always, from online banks.
Traditionally, checking accounts come with a debit card and a checkbook. These tools allow customers to spend money in the absence of physical cash.
You can use a debit card to access your account from an ATM and make purchases in stores. You can use paper checks for sending large sums of money.
Some checking accounts offer overdraft protection options, allowing customers without funds in their accounts to receive funds with an interest rate.
Account-holders can receive payment from their place of employment and electronic transfers into a checking account. Both offer direct deposit options, which automatically deposit the funds into the account.
A checking account is considered one of the most basic financial products and very straightforward to use. However, many checking accounts come with maintenance fees.
You should be very familiar with any checking account fees before using one. Different fees can become quite costly, such as non-sufficient fund fees and transaction limit fees. Some checking accounts also require a minimum balance.
If you find yourself using your checking account very often, it's probably a safe bet to get a free checking account though it may come with limited services.
Finally, checking accounts come with insurance. In America, checking accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). In Canada, chequing accounts are insured up to $100,000 by the Canada Deposit Insurance Corporation (CDIC).
You can open an account online, via telephone, or by visiting a branch online.
Different types of checking accounts
There are many different types of checking accounts available: personal, business, joint, and more.
Here are a few types of checking accounts to help you differentiate which checking account you should choose.
1. Personal Checking Account (🗽/🍁)
A personal checking account is a checking account for the average person and for only one person to manage their finances.
2. Joint Checking Account (🗽/🍁)
A joint checking account is a checking account, typically used by two or more people. The account is typically usually used by couples but not restricted to people in a relationship.
3. Business Checking Account (🗽/🍁)
A business checking account is a checking account dedicated to business owners.
These accounts come with options and special advantages tailored to business owners, such as reduced rates and easy access to special business-related privileges.
4. Hybrid Bank Accounts (🍁)
A hybrid account is an interest bearing chequing account. It combines a savings account with a chequing account.
Usually, hybrid accounts allow account holders to reap high-interest with a chequing account's flexibility, meaning that account holders can perform transactions without limitations or restrictions.
5. Money Market Account (🗽)
A Money Market Account combines a checking account with a savings account but provides higher interest than both.
Money Market Account holders must maintain a minimum account balance to reap the benefits of the account.
They typically come with a range of restrictions, depending on the bank issuing the account.
How to choose the best checking account for you
Every checking account has something different to offer. That’s why the best checking account for one person might not be the best fit for the next.
It’s important to consider what you’re looking for in a checking account before signing up for one. After all, you’ll likely use the same checking account for many years to come. Since there are many checking accounts available, there is a considerable amount of a handful of options to consider.
Here are a few aspects to consider before signing the dotted line.
1. Fees and Limits
Fees: the make or break of any purchase. Checking accounts usually charge customers a monthly maintenance fee for use.
Monthly fees on checking accounts tend to come with additional perks and privileges, ranging from branch access to generous transaction limits.
Checking accounts that charge fees on a monthly basis offer different packages. Some offer unlimited features for a flat rate, while others offer lower prices per month for a range of options.
If you find yourself using your debit card often, you may want to consider an unlimited bank account, typically offered by digital banks.
Digital banks offer products that exist entirely online. While they are often a no-cost product, they do not usually offer branch access and come with limited financial tools.
An ATM Network is a network of ATMs from the same bank or banks in partnership with each other.
If you find yourself using cash often, it is a good idea to choose a bank located near places you frequent. This can help you avoid service charges when you withdraw money.
Alternatively, it can also help you while traveling, as there are many banks partnered with each other overseas, which will help you save money on service fees.
3.Mobile Banking and Customer Service Options
Everything’s online nowadays. Banks are no different. Pretty much every bank provides online banking and telephone access, making money management available from basically anywhere your cellular phone can be used.
Consider whether or not your bank or credit union offers a mobile app. In rare instances, they don’t evaluate their customer services, such as promptness and operation hours.
4. Additional Banking Products and Services
While this article’s focal point is checking accounts, it’s important to consider other options that come with the financial institution of your choice.
Additional products to consider may include savings accounts, credit cards, and other financial tools that can improve your financial health.
People who like all of their finances in one place may find benefit in finding a financial institution with all of their money with one bank. It allows them to monitor their finances and debts closely.
Frequently Asked Questions
A checking account and a savings account are both accounts, but are different in that one is meant for spending and the other for saving.
In simpler terms, this means that savings accounts should keep the money for extended periods of time. Savings accounts offer earned interest and do not typically permit the same spending privileges that chequing accounts do.
Some checking accounts offer interest. However, in most cases, checking accounts offer low interest.
Yes, but not that much. Checking accounts serve as a loss-leader in hopes customers use other products offered.
Several fees can come with using a checking account, such as transaction fees and non-sufficient fund fees.
There are also monthly fees that come with some checking accounts. Using the chequing account if it is not a free checking account.
A commercial checking account is a checking account for businesses, small and commercial.
Many banks will require specific requirements to open such accounts and offer several business-oriented perks to those who qualify for the account.