A checking account is one of the most basic financial products, but also one of the most complex. Apply for a checking account online or at a branch, and you’ll get a small booklet covering all the terms and conditions. The amount of information can make it difficult to pick the right one for your needs. Understanding how checking accounts work will make your life easier and help you save money along the way. Here’s everything you need to know.
Types of checking accounts
There are five primary types of checking accounts from which you can choose. Each type has its own set of features, as well as pros and cons. Here’s a quick summary of each one.
1. Basic checking
As the name suggests, this type offers the most basic features of a checking account. You can write checks, pay bills, and transfer money to and from other accounts. These accounts typically don’t offer interest on your balance. And you may have to pay a monthly fee unless you receive a direct deposit or keep a minimum balance.
2. Free checking
These checking accounts function similarly to basic checking accounts. However, there is no monthly fee, regardless of your direct deposit activity or account balance. You may be charged with other fees, though. For example, you’ll have to pay a non-sufficient funds fee if you bounce a check. And make sure you’re aware of any ATM fees before you withdraw cash from an ATM outside of your bank’s network.
3. Interest-bearing checking
Some checking accounts offer interest on your deposits, but require a minimum balance to avoid a monthly fee. It is generally higher than what you’ll pay on a basic checking account. While some free checking accounts offer interest on your checking balance, most don’t. What’s more, most interest-bearing checking accounts don’t offer a high interest rate, so it’s generally not worth paying a higher fee.
4. Senior or student checking
These accounts typically provide all the same benefits of a checking or interest-bearing account, but waive the fee or offer other special deals to customers who qualify. For example, seniors will get special features once they reach age 55 and college students can keep their account fee-free until they graduate and
5. Money market
Money market accounts are technically considered checking accounts because they allow you to use a debit card or write checks. The difference, however, is that you’re limited to six withdrawals each month. They also require a minimum balance, which is often much higher than that of a traditional checking account. Money market accounts generally offer higher interest rates than regular checking accounts. So, if you don’t write many checks and can maintain a high balance, a money market account may be worth considering.
Institutions that offer checking accounts
You can get a checking account with a traditional bank, credit union, or online-only bank. Depending on which type of institution you choose, you may get different features.
Traditional banks — whether they’re a local community bank or a national retail bank — usually charge more fees on their checking accounts. That’s because they have the overhead costs of brick-and-mortar branches and their goal is to maximize profits for their shareholders. Therefore, these banks tend to offer great resources for their customers. They also make it easier to have all of your finances under one roof. Some even offer discounts on their loan products and extra credit card rewards if you have a checking account with them. Additionally, national banks have large ATM and branch networks that make it easy to get access to your funds, regardless of where you are in the country. Some even have international branches.
Credit unions are not-for-profit organizations owned by their members. So, any profits a credit union receives is returned to the members in the form of lower fees and higher deposit interest rates. “Credit unions tend to offer more attractive rates and have a high emphasis on customer experience,” said Megan Luke, senior vice president of retail distribution sales/services and operations director at PNC. “That being said, drawbacks include membership requirements, a thin or nonexistent network of ATMs and branch locations, and lack of technology.”
These banks typically don’t have physical branches, instead offering all their banking features through their mobile app or online. While online-only banks are for-profit institutions, they don’t have the same overhead fees that traditional banks have. As a result, they can usually offer free checking accounts and higher deposit interest rates. “Rates can look attractive with an online bank. But if you’re a heavy cash user, it can be difficult to conduct transactions,” says Luke. “If you require in-depth customer service, online-only banks lack the ability to provide personal, one-on-one, in-person assistance.”
Checking account costs
Depending on the type of checking account you get, you may need to worry about certain fees. Here are some major fees that you might run into as you search for the right account:
- Monthly maintenance fee: Some banks charge this fee just for the privilege of having the account. You can often get it waived by having a certain amount directly deposited into your account each month or maintaining a minimum balance. Some even waive it if you use your debit card a certain number of times.
- Early termination fee: If you close your checking account within three to six months of opening it, some banks will charge you an early termination fee. This is especially the case with checking accounts that offer sign-up bonuses.
- Research fee: If there’s a discrepancy between your records and the bank’s records, the bank will typically charge a per-hour fee to research the issue.
- ATM fee: There may be a fee if you withdraw cash at an out-of-network ATM. You may even have to pay a surcharge to the bank that owns the ATM.
- Check printing fee: Many banks offer free checks when you first open the account, but not all do. Even if you get free checks up front, you may need to pay a fee for future orders.
- Inactivity fee: If you don’t use your checking account for a few months, some banks will charge you a fee for inactivity.
- Non-sufficient funds fee: If you bounce a check, your bank may charge you a fee and refuse to honor the check.
- Overdraft fee: If you overdraw your account and the bank decides to cover the shortfall, it may charge an overdraft fee. More on how to avoid this fee in a bit.
- Stop payment fee: If you use a check to pay for something and then change your mind, the bank can void the check for a fee.
Average bank account fees
When you use your checking account, be careful of the fees that they charge. Here are average costs for the most common fees.
By using SuperMoney’s checking account comparison tools, you can find a better bank to avoid these fees that can drain your wallet.
What to look for in a checking account
Below are important features to look for when choosing a checking account that works best for you.
- Unlimited transactions. Even if you usually don’t make many transactions, make sure you won’t be charged extra if your activity is higher one month.
- Minimum balance requirements. Is there a minimum balance required before a bank will charge you a fee?
- Debit card. Having access to your account with a debit card for ATM usage or for debit transactions is critical in today’s society.
- Online banking and statements. Being able to check your account balance, view your transaction history, and download electronic copies of your statements is also a must.
- Free bill pay. Instead of writing checks, licking an envelope, and adding a stamp, bill pay takes care of all that for you. Simply pick your vendor, name an account, and choose a date for your payment to arrive.
- Fees for services you use. What other services will you use and how much does the bank charge for them? For example, how much is it to send or receive a wire transfer?
- Perks and benefits. What other perks and benefits are available? For example, some banks provide free credit scores.
- Overdraft protection. What happens if you overdraw your account? Overdraft protection ensures that payments are approved, even if you don’t have all of the money necessary.
How to get the best interest rate on your checking account
According to the National Credit Union Association, the average interest rates on checking accounts ranges from 0.11% to 0.17%. If you carry an average balance of $10,000, that’s only $11 to $17 per year. But you can do much better than that!
Now that interest rates are rising, the potential interest earned on your checking account could add up to real money. The average brick-and-mortar bank may offer interest rates of up to 0.2%. However, some high-yield checking accounts will over up to 5%. The SuperMoney checking account comparison page is designed to help you find the banks that offer the highest interest rates and lowest fees.
Filter the search results for the highest interest rates. As the results populate, filter down even more based on the average balance required to avoid any monthly fees. Interest is nice, but monthly fees will eat away at the earnings. Focus on a minimum balance requirement that you know you can maintain.
What is overdraft protection?
Overdraft protection is a feature that banks and credit unions offer to help you avoid bouncing a check or having your debit card declined if you don’t have sufficient funds. While that sounds like a generous offer, it’s not. Banks typically charge a $30 overdraft fee when it covers you, and credit unions aren’t far behind at $29. Fortunately, there are ways to get overdraft protection without paying a hefty fee.
Get an account with no overdraft fee
Some banks, such as Chime, don’t charge an overdraft fee at all. These banks are few and far between, though, so you’ll have to do your research to find the right one.
Opt out of overdraft protection
Banks and credit unions are required to ask if you want overdraft protection. By opting out, you can avoid the fee. However, you can still get hit with a non-sufficient funds (or NSF) fee if you don’t have enough cash to cover a check or debit card swipe. So, make sure you always have a buffer.
Connect your savings account or credit card
Some banks allow you to avoid an overdraft fee by connecting your savings account or credit card to your checking account instead. In this situation, if you overdraw your account, the bank will use your savings account or credit card to cover the shortfall. There’s usually no fee when this happens.
Apply for an overdraft line of credit
Instead of charging a fee, some banks will offer you a line of credit. These products typically charge interest. But if you get your account back in the positive within a few days, you’ll likely end up paying pennies instead of a steep fee.
How to find the right checking account for you
With so many checking accounts on the market, it’s important that you do your due diligence to find the right one. Start by considering the type of checking account you want, then think about what type of institution you’d like to bank with. Look at the overall money management experience. The account should offer mobile features and a variety of servicing options. Also, look at the size of the financial institution’s network if you want broad access to ATMs and branches.
Consider how you plan to use your checking account—look at the features and fees that different accounts offer. Depending on your needs, an account that charges a monthly fee may be better than a basic account with no fee. While you’re at it, check with the bank to see if it offers a sign-up bonus to new customers. Some banks will offer from $100 to $300 if you open an account and complete one or more activities. Examples include setting up direct deposit or using your debit card a minimum number of times.
If you’re switching from one checking account to another, keep in mind that it isn’t always a smooth process. If you have recurring charges coming out of your original checking account, for instance, you’ll need to update all of those with the new account information. But don’t let the process scare you away from getting a better checking account than you currently have.
Compare the best checking accounts and find the one that offers you the most value based on your needs.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.