What Is a Checking Account and How Does It Work?

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Although more than 7 million households in the U.S. have no bank account, most Americans have a checking account they use to pay bills, receive their paycheck and manage their basic finances. According to the U.S. Government Accountability Office, around 90% of adults have a bank account.

Read on to learn why they’re a valuable tool for personal finance:

What Is a Checking Account?

Checking accounts are demand deposit accounts that give holders easy access to their funds, often via debit cards. The high liquidity of checking accounts means that account holders can access their money as needed by withdrawing cash or using a debit card to pay for purchases.

In addition to paying for purchases, you can use a debit card to withdraw funds or shop online. Debit cards are not checking accounts, they are extensions of checking accounts. These payment cards are linked to the funds in the checking account, and the money immediately comes out of your account when you use them. 

Types of Checking Accounts

Banks offer an assortment of checking accounts designed to meet the needs of different customer groups. Some target specific age groups, while others provide customers with useful services and perks to help them manage their money.

• Basic Checking: Also called a no-frills, low-cost cost or starter account, these checking accounts typically allow you to receive deposits and pay bills online and mobile bill pay. Some basic checking accounts don’t include check-writing services.

• Interest Checking: The balance in an interest-checking account earns interest. These accounts aren’t replacements for savings accounts because they typically have a nominal interest rate lower than a high-yield savings account.

• Premium Checking: These accounts come with perks like ATM fee reimbursements, relationship rates on CDs and discounted services. You typically have to maintain a minimum balance or have multiple accounts with the bank to qualify for this account.

• Senior Checking: A senior checking account is reserved for senior citizens and some banks make it available to older customers. These accounts sometimes earn interest and may come with perks like free checks. 

• Student Checking: Some banks have student checking accounts designed for teenagers and college students. These accounts often have no fees and may come with a debit card to use when making purchases. Many banks convert these accounts to regular checking accounts when the student turns 24.

• Traditional Checking: Most banks and credit unions offer a traditional, or regular, account for basic transactions like paying bills, making purchases and receiving paychecks. Banks usually include check-writing services with traditional checking accounts.

What Are the Benefits of a Checking Account?

Checking accounts come with many benefits over both credit cards and savings accounts. Access to cash is safer and easier, there are convenient opportunities for direct withdrawals, and your transactions are automatically recorded.

Easier, Safer Access to Cash

Carrying a debit card associated with a checking account is safer than carrying cash. If you lose your card, banks can reimburse fraudulent charges and withdrawals, but you’ve got to move fast-within two business days. You won’t be held responsible for more than $50 in charges. If it’s beyond that two-day mark, you could be responsible for $500 in charges. However, if you lose a wallet with cash, anyone who finds the money can take it and spend it. Checking accounts offer a singular place to store your money and allow you to spend without risking carrying hard cash. 

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Direct Withdrawals 

When using your checking account or its associated debit card to buy something, you essentially withdraw money from your account. Thus, you will never need to worry about a long, impending credit card bill, as you only spend the money already in your account. In addition, if you’ve had trouble sticking to a household budget, a debit card can provide you with an alternative to cash and credit.

Automatic Record of Transactions 

Creating a household budget is impossible unless you know your spending patterns. If you use cash for your purchases, you’ll need to meticulously write down every purchase you make to keep an accurate record of your spending.

However, if you shop using just your checking account, the statement compiled by your bank will automatically act as a reviewable expense report. This makes it immensely easier to review your purchases afterward. What’s more, you can even connect a money management app to your online banking account to automatically categorize your transactions.

Budgeting Tools

Many banks now include digital budgeting tools as a service for checking account customers. These tools make it easier to set financial goals, manage your budget and track your spending.

For example, your bank may let you set up spending categories that work like digital cash envelopes. You can designate how much money to put in each category and let the app monitor your spending so you stay within budget.

What’s the Difference Between a Checking Account and a Savings Account?

There are two main differences between checking and savings accounts: the underlying principles of holding the accounts and the ease with which you can access your funds. Checking accounts make it easy to spend money, which is why most people use their checking accounts to pay for everyday purchases like groceries, clothing and other household goods.

Savings accounts, on the other hand, are designed to make access to funds difficult. These accounts are not associated with debit cards that you can use to withdraw funds directly. You might even be saddled with fees or penalties if you make too many monthly withdrawals from your savings account. 

However, you will earn interest on the funds held in your savings account, meaning your balance will increase over time even with no additional deposits. While this interest might be less than the possible returns of investing in a growth-oriented ETF or other stock market investments, you don’t need to worry about losing the money in savings accounts.

In reality, most account holders use their savings account to build a household emergency fund and save for major future purchases, like a house or an international vacation.

Final Take

In short, if you don’t already have a checking account, you’re missing out on some serious safety and liquidity benefits. Have no worries, though, for opening a checking account is easier than ever with more and more banks instituting online applications. Several online banks do not even maintain in-person locations, meaning that you can manage all of your checking services online.

That said, you should always review the account details regarding minimum balances, overdraft fees, online banking and withdrawal and deposit policies when deciding what kind of account is best for you.

Thomas Streissguth and Allison Hache contributed to the reporting for this article.

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