What Is a Checking Account and How Does It Work?

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Checking accounts are a more important part of a person’s life than many realize. Without a checking account, it can be difficult to do many of the things that others take for granted. There are plenty of reasons that you may need to have a checking account.

Why Do You Need a Checking Account?

If you want access to the financial system in the United States and the ability to enjoy the related benefits such as checking cashing, credit and/or debit cards, online shopping, car buying, buying a home, etc. a checking account is your first stop. It is the gateway. Many of the daily transactions we are all involved in go much more smoothly, quickly, and less expensively with a checking account.

Plus, it’s reassuring to know that your money is protected and safe. Banks deposits are insured by the Federal Deposit Insurance Corporation (FDIC) and accounts with credit unions are insured by the National Credit Union Administration (NCUA). If you’re simply keeping cash in a drawer or a coffee can at home, you aren’t guaranteed that safety. A fire or theft could mean you lose all your cash, which would be devastating.

Additionally, some employers will require direct deposit because they do not hand out paper checks. The easiest way to set up direct deposit with your employer is by first having a checking account.

Perhaps you’ve never had a checking account before, or maybe you want to open a new account after recovering from some financial difficulties. Regardless of the reason, it’s important to understand more about checking accounts, their benefits, and some of the most important information you’ll want to keep in mind. You’ll find what you need to know below.

What is a Checking Account?

A checking account is where you deposit the money you receive. The money could be a check from your employer, money owed to you by a friend, money received through selling some of your belongings, etc. The accounts are held at accredited financial institutions such as banks and credit unions. You can access the money by going into a brick and mortar facility, using an ATM card, or online.

The Benefits of Having a Checking Account

There’s no legal requirement saying that you need to have a checking account. So, why should you open one up? Consider the factors touched on at the beginning of the article. Checking accounts will simply make so many things easier.

Cashing checks will be easier and more convenient. You can have money from your employer deposited directly into your bank account, and you’ll be able to pay your bills and make purchases online. Bank accounts also tend to be cheaper than using other methods to manage your money. Since you can cash checks or deposit them for free at one of your bank’s branches, you don’t have to worry about paying exorbitant fees to a check-cashing service. The fees can vary, but check cashing stores typically charge around 5% or more.

This means that if you have a check for $1,500 you need to cash, you’ll pay at least $75 in fees. If you cash two checks a month of this amount, you’re paying $150 monthly or $1,800 a year in fees. Compare this to a checking account that charges you $10 a month for service and maintenance fees. It’s easy to see which option will save you the most money. Just imagine what you could do with all of that extra money!

Do Checking Accounts Pay Interest?

You might hear someone tell you that you should look for an “interest-bearing” checking account. This would be an account that earns interest over time. However, most checking accounts do not earn interest, and the reason is simple. The money in a checking account tends to fluctuate regularly as money is deposited and taken out of the bank. Banks have a difficult time paying interest on money that shows up in your account and then goes out over the next days and weeks to pay for food, rent, utilities, and other purchases. Banks will pay some interest on your checking account, but it usually comes with the stipulation that you keep a minimum balance.

A savings account, on the other hand, can earn interest because the money in the account is more predictable to the bank. If you start with a balance of $2,000 and add $100 to your savings every month, the bank has a much higher appetite to pay interest on your funds (albeit, the interest amount can seem painfully low). Savings accounts will earn more than an interest-bearing checking account, as well.

Note: We don’t believe you should worry much about being paid interest on your checking account balance. A checking account is a great place to keep the money to meet your short-term needs. You shouldn’t keep much more than that in a checking account. If you have excess, put it in an account that can pay a decent interest rate. To find out how much you should keep in a checking account, see this post from our sister website.

What Are Checking Account Fees?

Many bank and credit union checking accounts will require that the holder pay a monthly fee for what they call maintenance. This will vary from bank to bank. It’s generally at least $5, but it can be up to $12 per month or more. That said, we like banks that don’t charge any maintenance fees and have featured 4 of our favorites.

Keep in mind that there could be other service fees associated with using your checking account at the bank. For example, using the ATM might be free when you are withdrawing money from your bank’s own ATM network. But expect to get charged when you withdraw money from your Wells Fargo account at a Chase ATM.

There could also be a minimum requirement with some checking accounts. If you don’t keep a certain amount of money in the bank, they may charge a fee. Overdrawing from your bank account will typically result in fees, as well. This is discussed below.

Note: Some unscrupulous financial institutions charge high fees to checking account holders, particularly those who have had trouble getting checking accounts in the past. You don’t want to work with these banks. Even if you’ve had challenges with ChexSystems or TeleCheck or have bad credit, there are some really good banks that want your business without charging high fees. Take the time to find a free checking account, or a bank or credit union that only charges the standard fees.

What Are Overdraft Protection and Overdraft Fees?

What happens if you make a purchase or write a check that is for more than you have in your checking account? Often, the bank will cover the difference. This is called overdraft protection, and it’s something banks want you to sign up for when you are getting a checking account. But our experience here at CreditInfoCenter.com is that the VAST majority of consumers should avoid signing up for overdraft protection. Here’s why.

Banks across the nation have discovered that consumers don’t track their spending very closely. They have figured out “covering the difference” when a consumer ends up short is big business. In fact, overdraft protection is a multi-billion dollar business for some of the biggest banks. The banks love it when you come up short and they are all too ready to step in and pay your charge. Why? Because most banks will charge a $35 fee when a charge of $100 comes into your account and your account balance is only $75. So now that $100 charge becomes $135! This can add up to a substantial amount of extra charges if you’re not careful. You can also be charged each day that your account is overdrawn. It’s always important that you look into all of the fees that the bank might charge, so you aren’t hit with something unexpected.

Why Overdraft Fees Should Be Avoided...
If you have $100 in your checking account and you have a charge for $75, a charge for $32, and a charge for $55, you’ll incur two overdraft fees. The first $75 charge was no problem since you had $100 in the bank. However, the $32 will cause an overdraft fee. The next purchase of $55 will incur a second overdraft fee. Banks love these types of customers because of the overdraft fees they earn.

Take our advice and sign up for a checking account that doesn’t offer overdraft protection. That way, if you don’t have enough money in your account, your transaction won’t go through or won’t be paid. In our view, that’s much better than incurring a ridiculous fee. Here’s a list of our favorite banks with no overdraft service. If you still want to set up an account with a bank that offers overdraft protection, all you need to do is opt-out of the service. You can do that online or call your bank and instruct them to opt you out.

Benefits of Direct Deposit

Remember, some employers today require that you have direct deposit. However, even if it’s not a requirement of your employer, you may still want to consider getting this service. Direct deposit offers some great benefits.

One of the biggest benefits is convenience. It means that you won’t have to stand in line at the bank—and hope you get to the bank before it closes—to cash your check. The money will be in your account automatically. This helps to reduce your risk of being overdrawn, as well. Even if you are on vacation, you’ll still get your payment on time and deposited right into your account.

Another reason to consider direct deposit is the fact of the safety it offers. You don’t have to worry about losing or misplacing your check on the way to the bank. You don’t have to worry about the check being damaged and needing to request another one from your employer’s payroll department either.

Getting Setup: Starting direct deposit is easy. You will ask for a copy of your employer’s direct deposit signup form, or you can typically download or request an authorization form from your bank. You’ll need your bank account number and your routing number (see below for more information on these important numbers), the type of account, the bank name and address, and the name of the account holders on the account. Provide the information to your employer and ask them how long it typically takes for them to get everything set up. Typically, it’s a matter of days or weeks at most. It’s that simple.

Where is Information Located on Your Check?

There are two important numbers that come with your checking account. The first is your account number. The second is the bank routing number. A routing number is sometimes referred to as an ABA number.

So, where can you locate these numbers on a check? It’s all easy to find and understand. The routing number is usually found on the front of the check on the bottom left side. The account number will be to the right of the routing number. If you aren’t certain, you can log into your online checking account and find the information there, or you can call your bank or credit union to get the information. Most banks have powerful smartphone apps and you should be able to locate both numbers there.

Your account number is unique to you and you are the only one at the bank or credit union with that account number. On the other hand, a routing number identifies the bank, credit union, or financial institution. It is unique to the financial institution. For example, everyone with a checking account at “ABC Community Bank” has the same routing number. So when you sign up for direct deposit, your employer knows to which bank (ABC Community Bank) payment should be sent based on the routing number. And when the bank receives the money from your employer, they automatically send it to your unique account number.

Filling Out a Check

If this is your first checking account, or your first account in years, you’ll probably want a quick refresher on how to fill out a check properly. After all, many people pay for everything online, so they haven’t had to write checks in a while. Still, it’s a skill you’ll want to have for those times you do need it.

Fortunately, it’s easy to do.

  1. Add the date to the dateline on the check. This is usually in the upper right corner.
  2. Write the name of the person or company the check is going to on the line that says, “Pay To The Order Of”.
  3. Below the date will be a box where you’ll write the amount of the check in number format. Be sure to include decimal points in the right places.
  4. Write the payment amount in words on the line below the “Pay To The Order Of” line. If you have a check for $120.20, you write—”One hundred twenty and 20/100″ on the line. If the dollar amount doesn’t have any change, such as $120.00, you would write—”One hundred twenty and 00/100″ on the line.
  5. Sign the check on the bottom right corner.
  6. Write what the check is for, such as “Rent” on the memo line.

As you can see, it’s easy to fill out a check. Before you hand it over, though, be sure that you double-check everything.

Image source: Investopedia.com
Did You Know: You can make the check out for cash if you write CASH on the “Pay To The Order Of” line. However, this can be risky if the check is lost or stolen because anyone can cash it.

What Are Online Checking Accounts?

Today, you can access your checking account online regardless of what bank you might have. You might set up an account through a bank that offers online checking and that provides brick and mortar locations. However, there are also options for online banks. These banks and credit unions do not have physical locations. Sometimes, they will have lower fees and better interest rates, as well, but this varies.

Having online banks provides you with more options when you are searching for a bank. As always, you need to research the banks to ensure they are legitimate and that they have the types of services and fees that you’ll need. For example, will they accept direct deposit? Always vet the options you are considering, ensuring they are the right bank for you.

How to Choose the Right Checking Account

When you are looking for a quality checking account, there are certain things you’ll want to keep in mind and look for. These include:

  • No monthly fee/free checking account
  • No minimum balance requirement
  • No limitations on the number of transactions
  • No limitations on the method of transactions
  • Free ATMs
  • Mobile and online access

Remember to research the banks or credit unions you are considering. The more you learn about the options you are considering, the easier it will be to find the right bank for your needs.

While different financial institutions will have various requirements and paperwork for you to complete when setting up an account, it tends to be fast and easy. Contact the bank you’re considering and ask them what information you’ll need to have.

What is a Free Checking Account?

When you start to look for the right checking account for your needs, you’ll often run across offers for free checking. Ideally, you’ll find a free checking account and that doesn’t have a monthly maintenance fee. Since many banks have fees between $5 and $10 a month, it means you could save anywhere from $60 to $120 annually.

However, when you’re offered a free checking account, always look at the fine print to make sure there aren’t any strings attached. For example, some banks might offer free checking, as long as you keep your balance at a certain level, such as $2,000 or $3,000.

You should also keep in mind that a free account typically only refers to the maintenance fees. You’ll still have to pay other fees, such as overdraft fees, as discussed earlier.

Keeping Track of Your Expenditures and Your Budget

Once you have your checking account set up it tends to be easy to manage. However, you need to remember that it’s a tool just like anything else. You need to make sure that you’re keeping an eye on the money you have in your account and that you keep track of your budget.

Whether you use software for this, or you use the ledger provided by your bank to do it by hand, this will help you keep track of your money. Keeping good track of your expenditures means you won’t have to worry about running into overdraft issues. You’ll know how much money you have available at a glance. Being able to access your account online can make things even easier.

Having a checking account, whether it’s only an online checking account with an online bank, or it’s a traditional brick-and-mortar bank can give you some peace of mind. They are easy to set up, and once you do, you may find that you also want to start a savings account.

A savings account, even if you are only putting in a small amount of money at a time, will start to grow. Having some money in your savings will give you have better control over your money and can reduce some of your financial worries.


Now that you have a better understanding of checking accounts, their benefits, and how to find the right bank or credit union, it’s time to get started. They can help to make so many aspects of your life much easier.

Once you have your checking account set up and running, it essentially takes care of itself. You don’t have to worry about the safety of your money, and you can access it easily. Take the time to find a financial institution that offers either free checking or that only charges the usual and customary fees.

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