Checking Account

What Is a Checking Account?

A checking account is a deposit account held at a financial institution that allows withdrawals and deposits. Also called demand accounts or transactional accounts, checking accounts are very liquid and can be accessed using checks, automated teller machines, and electronic debits, among other methods. A checking account differs from other bank accounts in that it often allows for numerous withdrawals and unlimited deposits, whereas savings accounts sometimes limit both.

Understanding Checking Accounts

Checking accounts can include commercial or business accounts, student accounts, and joint accounts, along with many other types of accounts that offer similar features.

A commercial checking account is used by businesses and is the property of the business. The business' officers and managers have signing authority on the account as authorized by the business' governing documents.

Some banks offer a special free checking account for college students that will remain free until they graduate. A joint checking account is one where two or more people, usually marital partners, are both able to write checks on the account.

In exchange for liquidity, checking accounts typically do not offer high interest rates (if they offer interest at all). But if held at a chartered banking institution, funds are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per individual depositor, per insured bank.

For accounts with large balances, banks often provide a service to "sweep" the checking account. This involves withdrawing most of the excess cash in the account and investing it in overnight interest-bearing funds. At the beginning of the next business day, the funds are deposited back into the checking account along with the interest earned overnight.

Checking Accounts and Banks

Many banking institutions offer checking accounts for minimal fees. Traditionally, most large commercial banks use checking accounts as loss leaders. A loss leader is a marketing tool in which a company offers a product or several products below market value to attract consumers. The goal of most banks is to attract consumers with free or low-cost checking accounts and then entice them to use more profitable offerings such as personal loans, mortgages, and certificates of deposit.

However, as alternative lenders such as fintech companies offer consumers an increasing number of loans, banks may have to revisit this strategy. Banks may decide, for example, to increase fees on checking accounts if they cannot sell enough profitable products to cover their losses.

Money Supply Measurements

Because money held in checking accounts is so liquid, aggregate balances nationwide are used in the calculation of the M1, money supply. M1 is one measure of the money supply, and it includes the sum of all transaction deposits held at depository institutions, as well as currency held by the public. M2, another measure, includes all of the funds accounted for in M1, as well as those in savings accounts, small-denomination time deposits, and retail money market mutual fund shares.

Using Checking Accounts

Consumers can set up checking accounts at bank branches or through a financial institution's website. To deposit funds, account holders can use ATMs, direct deposit, and over-the-counter deposits. To access their funds, they can write checks, use ATMs or use electronic debit or credit cards connected to their accounts. 

Advances in electronic banking have made checking accounts more convenient to use. Customers can now pay bills via electronic transfers, thus eliminating the need for writing and mailing paper checks. They can also set up automatic payments of routine monthly expenses, and they can use smartphone apps for making deposits or transfers.

Don't overlook checking account fees — there are things banks won't widely advertise to people who aren't reading the fine print, including contingent fees like overdrafts.

Overdraft Protection

If you write a check or make a purchase for more than you have in your checking account, your bank may cover the difference. This line of credit offered by the bank is called overdraft protection.

What many banks don't tell customers is that they'll charge you for each transaction that causes your account to use an overdraft. If you have a $50 account balance, for example, and you make purchases using your debit card of $25, $25 and $53, you will be charged an overdraft fee — usually a hefty one — for the purchase that overdrew your account, as well as for each subsequent purchase after you're in the red.

But there's more. In the example above in which you made three purchases of $25, $25 and $53, you wouldn't just be charged a fee for the last purchase. Per the account holder agreement, many banks have provisions stating that in the event of an overdraft, transactions will be grouped in the order of their size, regardless of the order in which they occurred. This means the bank would group those transactions in the order of $53, $25, $25, charging a fee for each of the three transactions on the day you overdrew your account. Furthermore, if your account remains overdrawn, your bank may also charge you daily interest on the loan.

There is a practical reason for clearing larger payments before smaller payments. Many important bills and debt payments, such as car and mortgage payments, are usually in large denominations. The rationale is that it is better to have those payments cleared first. However, such fees are also an extremely lucrative income generator for banks.

You can avoid overdraft fees by opting out of overdraft coverage, choosing a checking account with no overdraft fees, or keeping money in a linked account.

Some banks will forgive one to four overdraft charges in a one-year period, though you may have to call up and ask. Chase Bank, for example, waives the fees for insufficient funds incurred on up to four business days in every 12-month period on its Sapphire Checking accounts.

Checking Account Service Charges

While banks are traditionally thought of as generating income from the interest they charge customers to borrow money, service charges were created as a way to generate income from accounts that weren't generating enough interest revenue to cover the bank's expenses. In today's computer-driven world, it costs a bank pretty much the same amount to maintain an account with a $10 balance as it does an account with a $2,000 balance. The difference is that while the larger account is earning enough interest for the bank to earn some income, the $10 account is costing the bank more than it's bringing in.

The bank makes up for this shortfall by charging fees when customers fail to maintain a minimum balance, write too many checks, or, as just discussed, overdraw an account.

There may be a way to get out of at least some of those fees on occasion. If you're a customer of a large bank (not a small-town savings-and-loan branch), the best way to avoid paying non-recurring fees is to ask politely. Customer service reps at large banks are often authorized to overturn hundreds of dollars in charges if you merely explain the situation and ask them to cancel the charge. Just be aware that these "courtesy cancellations" are usually one-time deals.

Direct Deposit

Direct deposit allows your employer to electronically deposit your paycheck into your bank account, which makes the funds immediately available to you. Banks also benefit from this feature, as it gives them a steady flow of income to lend to customers. Because of this, many banks will provide free checking (i.e., no minimum balance or monthly maintenance fees) if you set up direct deposit for your account.

Electronic Funds Transfer

With an electronic funds transfer (EFT), also known as a wire transfer, it's possible to have money directly transferred into your account without having to wait for a check to come in the mail. Most banks no longer charge to make an EFT.

ATMs make it convenient to access cash from your checking account or savings after hours, but it's important to be aware of fees that may be associated with their use. While you're typically in the clear when you use one of your own bank's ATMs, using an ATM from another bank could result in surcharges from both the bank that owns the ATM and your bank. However, surcharge-free ATMs are becoming increasingly popular. 

Cashless Banking

The debit card has become a staple for anyone who uses a checking account. It provides the ease of use and portability of a major credit card without the burden of high-interest credit card bills. Many banks offer zero-liability fraud protection for debit cards to help protect against identity theft if a card is lost or stolen.

Checking Accounts and Interest

If you choose an interest-bearing checking account, be prepared to pay plenty of fees — particularly if you can't maintain a minimum balance. According to a Bankrate study, in 2020 the average minimum balance required to avoid a monthly fee on an interest checking account was $7,550, up 6% from the year before. The most common balance required to avoid fees on non-interest checking accounts is $594.

This minimum amount is typically the combined total of all your accounts at the bank, including checking accounts, savings accounts, and certificates of deposit. If your balance falls below the required minimum, you'll have to pay a monthly service fee, which comes out to about $15 on average for interest-bearing accounts. And in today's era of low-interest rates, the average yield on these accounts is only around 0.04%, according to the Bankrate study.

Only a handful of banks serve up free interest-bearing checking accounts with no strings attached. However, if you have a longstanding favorable relationship with your bank, you might get the fee on your interest-bearing checking account waived.

Checking Account and Credit Scores

A checking account can affect your credit score and credit report under certain circumstances, but most basic checking account activities — such as making deposits and withdrawals and writing checks — do not have an impact. Unlike credit cards, closing dormant checking accounts in good standing also has no impact on your credit score or credit report. And oversights that result in checking accounts being overdrawn do not appear on your credit report as long as you take care of them in a timely manner.

Some banks do a soft inquiry, or pull, of your credit report to find out if you have a decent track record handling money before they offer you a checking account. Soft pulls have no impact on your credit score. If you’re opening a checking account and applying for other financial products, such as home loans and credit cards, the bank is likely to do a hard inquiry to view your credit report and credit score. Hard pulls reflect on your credit report for up to 12 months and may drop your credit score by as much as five points.

If you apply for checking account overdraft protection, the bank is likely to pull your credit since overdraft protection is a line of credit. If you fail to restore your account to a positive balance in a timely manner following an overdraft, you can expect the incident to be reported to the credit bureaus.

If you don't have overdraft protection and you overdraw your checking account and fail to restore it to a positive balance in a timely manner, the bank may turn your account over to a collection agency. In that case, that information also will be reported to the credit bureaus. 

How to Open a Checking Account

In addition to credit reporting agencies, there are agencies that keep track of and report your banking history. The official name of this report card on your bank accounts is "consumer banking report." Banks and credit unions look at this report before they will allow you to open a new account.

The two main consumer reporting agencies that track the vast majority of bank accounts in the United States are ChexSystems and Early Warning System.

When you apply for a new account, these agencies report whether you have ever bounced checks, refused to pay late fees or had accounts closed due to mismanagement. 

Chronically bouncing checks, not paying overdraft fees, committing fraud, or having an account "closed for cause" can all result in a bank or credit union denying you a new account. Under the Fair Credit Reporting Act (FCRA), if your checking account was closed due to mismanagement, that information can appear in your consumer banking report for up to seven years. However, according to the American Bankers Association, most banks will not report you if you overdraw your account, provided you take care of it within a reasonable period.

If there is nothing to report, that is good. In fact, that’s the best possible outcome. It means you have been a model account-holder.

Being Denied an Account

If you haven't been a model account-holder, you can effectively be blacklisted from opening a checking account. Your best course of action is to avoid problems before they happen. Monitor your checking account and make sure you check the balance on a regular basis to avoid overdraft charges and fees. When they occur, make sure you have sufficient funds to pay them, the sooner the better.

If you are denied, ask the bank or credit union to reconsider. Sometimes the opportunity to speak with a bank officer is all it takes to get the institution to change its mind.

You can also try opening a savings account to build a relationship with the financial institution. Once you are able to get a checking account, it can be tied to this savings account to provide DIY overdraft protection. 

Even if you have legitimate blots on your record, it’s important to know how your data is tracked and what you can do to fix a mistake or repair a bad history.

Tracking and Correcting Your Data

Under the FCRA, you have the right to ask the bank or credit union which of the two verification systems they use. If a problem is found, you will receive a disclosure notice, likely informing you that you will not be able to open an account and why. At that time, you can request a free copy of the report that was the basis for your denial.

Federal law allows you to request a free banking history report once per year per agency, at which time you can dispute incorrect information and ask that the record be corrected. The reporting services also must tell you how to dispute inaccurate information.

You can and should dispute incorrect information in your consumer banking report. It may seem obvious, but you should obtain your report, check it carefully, and make sure it is accurate. If it is not, follow procedures to get it corrected and notify the bank or credit union. The Consumer Financial Protection Bureau (CFPB) offers sample letters to dispute inaccurate information in your history.

When you contact one of the reporting agencies, be aware that it may try to sell you other products. You are not obligated to buy them, and declining them should not affect the outcome of your dispute.

You may be tempted to pay a company to "repair" your credit or checking account history. But most credit repair companies are scams. Besides, if the negative information is accurate, the reporting services are not obligated to remove it for up to seven years. The only way it can be legitimately removed is if the bank or credit union that reported the information requests it. So, you might be better served to try to repair your relationship with the institution on your own.

Some banks offer cash-only pre-paid card accounts for people who can't get traditional accounts. After a period of good stewardship, you may qualify for a regular account.

Many banks and credit unions offer other types of second-chance programs with restricted account access, higher bank fees, and in many cases, no debit card. If you are a candidate for a second-chance program, make sure the bank is insured by the FDIC. If it’s a credit union, it should be insured by the National Credit Union Administration (NCUA).