What Is a Demand Deposit Account (DDA)?

Demand deposit accounts are specifically designed to allow you to access your funds wherever and whenever you need to. They make it easy to pay for that spontaneous purchase and even for monthly bills like rent and utilities. In fact, if you use a debit card to pay for purchases, you most likely already have your own demand deposit account.

Keep reading to learn what qualifies as a DDA, the benefits of having one, and the pros and cons of using a demand deposit account.

What is a demand deposit account (DDA)?

A demand deposit account (DDA) is a type of bank account that allows you to access your money on demand and without advance notice. The type of DDA you’re probably most familiar with is a checking account.

In general, most people use their DDAs to pay for items regularly. So monthly rent, bills, groceries, and fun money are often covered through a person’s DDA.

How do demand deposit accounts work?

DDAs are designed to let the account holder withdraw and use their money at any time. The Federal Reserve calls DDAs transaction accounts, as they let the account holder operate transactions freely.

Here’s a list of the basic functions of a demand deposit account:

• Depositing money. Money can be deposited into your DDA through a physical or mobile check, direct deposits, or cash deposit at a bank or ATM. You are free to use the available funds whenever you need to.
• Interest rates. Depending on who your DDA is through, you may be able to earn interest on your account. This option, however, is not offered everywhere.
• Fees. Some DDAs require you to pay maintenance fees, out-of-network ATM fees, or other types of fees.
• Minimum balances. Some, but not all, DDAs require account holders to maintain a minimum balance in their account. You may have to pay a fee if you do not maintain this balance.
• Withdrawing funds. You can withdraw money from your account through a card, ATM withdrawal, check, or online bill pay.

Types of demand deposit accounts

Though we’ve talked about checking accounts, they’re not the only DDA available to use. Both money market accounts and savings accounts are also considered DDAs. Here’s a rundown of each to help you better understand what they are and why they’re considered a DDA.

Checking accounts

As we noted, a checking account is probably the type of DDA you’re most familiar with. Traditional checking accounts hold your funds and transfer the money as you spend it. You can spend money in your checking account through a debit card, check, or cash withdrawal.

Checking accounts are the most common form of DDAs for a reason: They make paying for living expenses extremely easy. So if you don’t already have one, take some time to review what each bank or credit union has to offer.

Savings accounts

Savings accounts are technically DDAs, as you can withdraw funds without giving your bank notice. But there are a few hold-ups to savings accounts that may not make them your primary account of choice.

First, some banks only allow you to withdraw money up to a certain amount of times (perhaps six times) a month. So while you don’t need to provide advance notice to withdraw funds, the amount you can take out will likely be limited. Second, many savings accounts have a minimum required balance, so you have to ensure that you maintain that balance. However, one of the benefits of a savings account over a checking account is that you’re more likely to earn interest on the funds.

If you’d rather not worry about maintaining a minimum balance, take a look at the savings accounts below, all of which have no minimum requirements.

Money market accounts

Money market accounts essentially combine a checking account with a savings account. With money market accounts, you can earn interest on deposits, use a debit card to make purchases or withdraw money, and access funds through a check. But, like a savings account, some financial institutions may only let you withdraw money up to six times each month.

Something to note about money market accounts: Not all financial institutions recognize these as DDAs. Though we’re categorizing them as a DDA in this article, keep in mind that your financial institution of choice may disagree.

Demand deposit accounts vs. other deposit accounts

There are other types of deposit accounts available to use, but not all deposit accounts are demand deposit accounts. Let’s review a few other deposit accounts you may run into when researching which account to open.

NOW account

Negotiable order of withdrawal (NOW) accounts are basically checking accounts that allow you to earn interest on deposited money. What makes NOW accounts different from DDAs is that many financial institutions require advance notice before withdrawing money. A NOW account is not recommended for those who have to make regular purchases.

Time deposit account

Time deposit accounts, also referred to as term deposit accounts, require the account holder to leave their money untouched in the account for a set amount of time. You receive interest in exchange for doing this. Financial institutions that don’t consider money market accounts a DDA typically consider them a term deposit account instead.

The most well-known type of time deposit account is a certificate of deposit (CD). CDs allow you to set aside a lump sum of money for a set amount of time. You gain interest on these funds while leaving them untouched.

Pros and cons of demand deposit accounts

Now that we have an idea of what demand deposit accounts are, let’s review why you may want one and what caveats to consider.

Is a demand deposit account right for me?

Demand deposit accounts are for those looking for a way to access their money quickly and regularly. Demand deposit accounts allow you to pay for frequent expenses (such as groceries, rent, and bills) without having to give your bank or credit union a heads-up. However, you likely won’t earn much interest through your demand deposit account.

So if you’re looking for an account that will build interest, look into investing in time deposit accounts such as a CD or high-interest savings accounts. You can also look into investing in stocks or bonds. These methods are better suited for those who want to earn interest and already have a reliable way to pay for everyday expenses.

FAQs

Is a demand deposit account a checking account or a savings account?

Both checking and savings accounts are considered DDAs, as you can access those funds without having to give your bank or credit union advance notice. The difference between the two is you’re usually paid interest with a savings account, while that isn’t as common for a checking account.

What is the difference between a demand deposit and a time deposit?

You can access your funds instantly with a demand deposit account. You cannot access money in a time deposit account without having to pay a fee or give your bank or credit union notice about the money withdrawal.

Camilla Smoot

Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.