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Personal Finance

What Is a Checking Account?

A checking account is a bank account designed for managing everyday payments by letting you make regular cash deposits and withdrawals. Simply, a checking account holds your money until you direct your cash where you need it to go.

You can easily deposit your wages, salary or other funds into a checking account, and use that money to pay bills, make purchases or withdraw cash as needed.

Historically, payments from checking accounts were made using paper checks—signed vouchers you can give to merchants or creditors authorizing your bank to pay the amount you write on each check. While paper checks are still acceptable for most bill payments and purchases (and are still issued by some employers to pay workers' wages), paperless checking transactions are much more common today.

Virtually all U.S. financial institutions let you use your checking account to make secure electronic transfers to pay bills and make online purchases. Likewise, retail purchases are much more commonly made using debit cards or contactless payments (via services such as Apple Pay and Google Wallet) that take payments from your checking account. Many employers also direct-deposit your pay into your checking account via electronic transfer.

Different Types of Bank Accounts

Checking accounts differ from other types of consumer bank accounts in their accommodation of frequent deposits and withdrawals. In contrast to accounts that pay interest to encourage long-term deposits, and which often charge fees for frequent withdrawals, checking accounts often pay little or no interest on deposits, but they typically allow unlimited transactions each month.

Certificate of deposit (CD) accounts pay comparatively high interest rates (currently around 2.7%) on funds you agree to leave in the account for a fixed period of time (typically 12 or 18 months). You can withdraw funds from a CD in an emergency, but banks typically charge a penalty for doing so.

Savings accounts pay a lower interest rate than CDs (roughly 2.4% at this writing), but allow withdrawals without penalty—although many charge fees if you make more than a certain number of withdrawals per month.

Many checking accounts pay no interest at all, and those that pay interest typically offer lower rates than savings accounts (generally 1% or less in today's market). They may also require you to meet specific conditions to qualify for interest payments, such as setting up automatic paycheck deposits, maintaining a specific minimum balance (or average monthly balance), and making a minimum number of electronic bill payments each month.

Benefits of a Checking Account

Opening a checking account is typically an important first step on the path to financial independence. A checking account gives you a place to deposit first paychecks and is a conduit for paying rent, cell phone and utility bills, and making payments on car loans and student loans. The benefits of having a checking account include:

  • Flexibility in paying for goods and services, via paper checks, electronic bill pay services, debit card payments and contactless payments using your smartphone.
  • Fast access to your earnings, without risk of loss or theft of a paper paycheck, through direct electronic deposit.
  • Federal insurance on deposits up to $250,000.
  • Access to cash via debit card at automatic teller machines (ATMs) and via cash back options at grocery stores and many other retail outlets.

How to Choose a Checking Account

When deciding where to open a checking account, there are a few things you should keep in mind:

  • Account types. Many financial institutions offer several tiers of checking accounts, and they may push high interest accounts and free services that only apply to account holders who plan to maintain high account balances. If that's not you, ask about personal checking and be sure to find out what fees apply. If you're a student, ask about a student account; some institutions waive standard monthly fees for students (or anyone under age 24).
  • Office locations. It may be convenient to pick a financial institution with locations near home or your workplace—but then again, that may not matter much once you set up your account and make your first deposit. If you arrange for direct paycheck deposit (and you should, if it's an option with your employer) and use online banking to monitor transactions and pay bills electronically, you probably won't need to visit the bank in person very often. Note that a growing number of financial institutions offer "nontraditional" offices in grocery stores and other retail locations—sometimes with longer hours than in freestanding branches.
  • ATM access. Using a debit card or contactless payment is more secure, but sometimes you just need cash. ATMs are often the most convenient way to get it—and they may be the only option outside of normal business hours. While your debit card may work at wide variety of ATMs, most financial institutions charge fees to ATM users who aren't account holders, so if you plan on making cash withdrawals often, consider choosing a bank with lots of ATMs.
  • Overdraft protection. You obviously shouldn't make payments that exceed the amount of cash in your checking account, but mistakes happen. If you do so, overdraft protection will cover your overage (up to a certain amount) so your payments will clear. The bank will likely charge you a fee for overdrawing your account, but you'll be spared penalties your payee might charge for processing an insufficient payment.
  • Fees. If you can, find a checking account that doesn't charge fees. Some accounts charge fees if you allow your average monthly balance to dip below a certain amount, or if you exceed a certain number of electronic transfers each month. All financial institutions will charge a fee if you overdraw your account, but some are more severe than others, and you may want to seek out a more forgiving institution.
  • Consider a credit union. When comparing candidates for opening your first checking account, take a look at credit unions as well as banks. In many cases, they offer lower fees and minimum balance requirements than banks, and some will even pay you back if other institutions charge you ATM fees, up to a certain dollar limit per month.

How to Open a Checking Account

Opening a checking account is straightforward. There's not much more to it than visiting a branch office with your ID, proof of address (a utility bill will suffice) and cash or a check for your initial deposit, and filling out an application. Once you complete the application, the bank will send you a debit card and checks (if you want them), and you'll be able to start depositing and withdrawing money using your new account. For more information, see "How to Get a Checking Account."

Importance of Staying in Good Standing

A potential hitch to opening a new checking account is trouble over a past one. Your institution likely will run a ChexSystems report, which will reveal any old accounts you may have that are not in good standing. If you closed or abandoned an account with unpaid fees, for example, or failed to pay back an overdrawn account, the ChexSystems report will flag it, and you probably won't be able to open a new account until you make things right with the old one. This underscores the importance of avoiding overdrafts and paying all fees and penalties promptly if you do make a mistake.

How Does Having a Bank Account Affect My Credit?

The status of your bank account doesn't affect your credit scores directly, but insufficient funds can lead to missed bill payments, and that can lower your scores.

That's why opening a checking account can actually help your credit scores if you manage it well. While improving your credit won't happen automatically—and is no guarantee just because you open a checking account—once you have a bank account, you can set up automatic bill pay with your credit card, utility, medical and other bills, which can ensure you never miss a payment. Because payment history has the biggest influence on your credit scores, showing future creditors that you're able to manage your monthly payments on time will reassure them that you are financially responsible—and that may make them more likely to lend to you, whether via loan or credit card.

Once you've had your account for a while and have been paying your utility and telecom bills on time through your account's bill pay program, you could actually improve your credit. Experian Boost ™ is a program that counts your utility and telecom payments in your payment history, which can help you begin building a better FICO® Score* before you even take out a loan or credit card.

Banking on a Second Chance

If you've made major errors with a checking account in the past, you may have difficulty opening a standard checking account anywhere, even after you've settled outstanding payments on your old account. In that case, you may want to seek out a second-chance banking account.

Institutions that offer these accounts typically waive ChexSystems reports, and they may limit the services available on your checking account (excluding overdraft protection, for example). But a second-chance account will let you pay your bills and build up a positive ChexSystems record so that you can eventually open a full-service checking account.

Checking Off a Financial Milestone

Opening a checking account is an important step toward taking control of your financial life, establishing responsible bill payment habits, and demonstrating the money management skills lenders look for in potential borrowers.


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