This post is really geared more towards those just starting out in banking and finance, but hopefully you savvy folks will find some things of interest, too. With that said, I’m going to just jump right into this piece because it’s quite lengthy.
A checking account is a service provided by a financial institution that allows accountholders to deposit and withdraw money from a federally protected account. This account allows the use of a debit card and/or checks, and there are generally no restrictions on the number of deposits and withdrawals that can be made. The rules and regulations of the account will vary from institution to institution, some may impose balance requirements while other do not, but generally, each financial institution will have three to four different types of checking accounts. Some will have more, some will have less.
Account Types You May See
1. Free Checking
This is probably one of the more popular accounts with any financial institution because this usually means no fees for the account – unless you overdraft. However, make sure you read the fine print. Some financial institutions may require that you have direct deposit or some other qualifying restriction in order to get the free account.
2. Second-Chance Checking
Not all institutions offer this account, so if it’s something you need, you’ll have to check with the individual institutions.
Whenever you open an account, the financial institution will run a check on you with either Chexsystems or TeleCheck, depending on which they use. These two systems do not hit your credit when checked, but they do let the bank know if you’ve had any history of writing bad checks or account abuse (charged off accounts with other banks). If you are on either of these systems, the financial institution is likely to turn you away. The downside to these systems is that even if you’ve paid off any negative history, your name stays within the system for five years.
The second-chance checking account allows you to open the account with the institution regardless of whether or not you show up on this list. Of course, there are certain restrictions that apply and you’ll need to check with the institution opening the account for more details. It’s fairly new in the industry, so there’s not really a set standard on how each one operates.
3. Regular Checking
These are your sort of middle-of-the road checking accounts. They are usually one of the first accounts your particular financial institution offered before Free Checking came along, and may have some balance requirements and fees associated with it. It may also be what is considered a grandfathered account, that is, the financial institution no longer offers it, but if you already have it they won’t make you change accounts.
The trouble with this account is that with the advent of the free checking, there’s not much use to be in an account that imposes balance restrictions and/or monthly fees. Sometimes these accounts will offer nominal interest; however, it certainly isn’t enough to offset a fee if you fall below the minimum balance. If you’re in an account like this, I highly recommend looking for a free checking account as most financial institutions do offer the free checking.
4. High Yield Checking
These accounts usually come with a higher interest rate than your regular checking and even the regular savings accounts. The interest is usually tiered based on the balances that you keep, but the account is really for those who like large balances in their checking accounts. Because the interest rates are higher, so are the balance requirements and in some cases the monthly fee for falling below.
In rare cases, a financial institution may offer this account with a standard monthly fee; however, in addition to the higher interest rates, you get other benefits such as accidental death and dismemberment insurance, travel and entertainment discounts, and various other package goodies. In this case, your financial institution should tell you what balance you should be keeping in order to earn enough interest to offset the monthly fee.
It’s important to understand that checking accounts can be overdrawn if the accountholder is not careful. The fee itself will vary; however, the average charge is about $30. In most cases, this fee is per item that overdraws your account…regardless of the amount. So, if you have four items that come through and overdraw your account, that’s $120.
You do have some options. First and foremost, it is important that you keep a register or some other means of efficiently tracking your balance. I agree that charging $30 for an item that overdrew you $2 is ridiculous, but if you didn’t spend more than you had, you wouldn’t get the fee in the first place. Take some responsibility and keep track of your finances.
Second, you can get overdraft protection. True overdraft protection will come in one of three forms: savings, line of credit, or a credit card. If you have overdraft protection linked to your account, the you avoid paying the $30+ in fees. Some institutions may still charge a nominal fee for the transfer from your protection account (usually $2-3), but that $8-12 is much better than paying for $120. I’ll be going over these three forms of overdraft protection in more detail in an upcoming post.
Finally, you should have the option to opt-out of overdrawing the account. What this means is that you bank can switch off the feature on your debit card that allows you to go over what you have in your account, and your card will be declined at the time of purchase. The one caveat to this is that pending transactions will still overdraw the account. For example, if you use your debit card as credit and sign for it, the purchase clearing your account is dependent on the merchant and when they batch their credit card items. It could take several days to clear the account. If you use your card in the meantime, forgetting to subtract out the first purchase and spend more than what you have available, that pending charge will clear and overdraw you. Again, be careful and keep track of your balances.
There are any number of fees that can be charged to a checking account. For more details on fees, read a previous post I wrote on why banks and credit unions charge fees. The best way to avoid any fees is to know what they are and don’t do the activities that cause them. Ask questions when opening your account and make sure you read your disclosures. Yes, I know it’s long and probably not all that interesting to read, but it does give you all the information you need to know about your financial institution.
Savings accounts are meant to help you save money, hence the name. Therefore, they come with limits, balance requirements, and excessive withdrawal penalties. These restrictions will vary from institution to institution, as well as, from banks to credit unions. There is also a difference between regular savings accounts and money market accounts.
A look at bank savings accounts
The most common savings account is the basic account with a $300-500 minimum balance requirement. Anything below this balance will usually trigger a fee; however, sometimes you can find special deals with your local banks when they want to increase their deposits. One promotion you might see is a waiver of the balance requirement if you set up automatic transfers from your checking account every month.
Along with balance requirements, there is also a limit to the number of withdrawals you can make a month. According to Regulation D , savings accounts are limited to 6 withdrawals per month, with the exception of in person withdrawals. Anything over six will incur a fee (from the financial institution) and generate a letter explaining that if you continue to go over your withdrawal limits the account will be converted into a checking account. The fee will vary – like most others – but is usually instituted by the bank or credit union as a deterrent. However, some banks may charge a higher penalty than others, so be sure to ask about this when opening the account.
A money market is still considered a savings type account and is fully insured up to the current $250,000 per account styling. The difference between a basic savings and a money market is the interest. Money markets offer higher yields that are generally tiered based on the balance in the account. With the higher interest comes a higher minimum balance and monthly fee for falling below. Money markets also have the same federal restrictions as savings accounts in terms of withdrawal limits, with one exception. Money markets are given check writing privileges and, as such, you are allowed three checks per month as part of your original six.
A look at credit union savings accounts
Credit union savings accounts work mostly the same way as a bank’s accounts, with a small exception. Along with consumer limitations under Regulation D, banks and credit unions have their limitations, too. One of those limitations is the amount that we are supposed to keep in reserves. You see, for every savings account that a bank has, they have a certain percentage that must be kept in reserve…which is one of the reasons for the account limits. This ensures (by either the balance or the fee generated) that banks can keep their allotted amount in reserve.
Credit unions are a little different in most cases. Credit unions usually have what’s called a membership share – or a basic savings account. We require you to keep $25 in the account while you have your accounts with the credit union. This buys your share of membership with the credit union, but will be returned to you if you should decide to leave the credit union at a later time. The account can still be used as a savings account (that is what it is) and you can deposit or withdrawal all but the $25.
However, credit unions calculate their reserve requirements different than banks, and in so doing, our reserves are not counting on the balances in those basic savings. What that means to members is that regular savings accounts don’t have the same Reg D restrictions as a bank’s regular savings. You can withdrawal as often as you want. A credit union’s reserves are based on the balances in the money market accounts, so those accounts are the only ones with the Reg D restriction. Money markets with credit unions only allow the six withdrawals a month, allowing three of which to be checks if a member would like.
Both bank’s and credit union’s have their advantages and disadvantages and you need to look at all of your options before deciding which one to go with. Then again, there’s nothing wrong with having both. Just be sure you know what you’re getting into before you sign on the dotted line.
What questions do you have about the difference between checking and savings?