One of the most common types of deposit accounts is the checking account. These are the accounts from which most people take care of their business. Checking accounts are generally used for paying bills and making purchases. When people have their paychecks directly deposited, they normally have the money put into a checking account. You can access your money with the help of a debit card, by writing checks or withdrawing it at an ATM or teller window. You can also arrange ACH transfers over the phone or Internet.
Checking Account Options
You should understand your options when it comes to opening a checking account. There are many different types of accounts and promotions run by various banks. Three of the most common types of checking accounts include:
Free Checking: A free checking account is probably the most common account. There are usually no service charges, and you often do not have to maintain a minimum balance. You can write an unlimited number of checks, and engage in a limitless number of transactions. While there are still some fees associated with free checking accounts, these are usually minimal.
Interest Checking: You can actually earn a return on many checking accounts now. The bank will pay you a small amount of interest on the money that is kept in your account. You probably won’t see check writing or transaction limits on an interest checking account. However, you might have to maintain a minimum balance to avoid a fee. Other opportunities to earn interest include high yield savings account, money market accounts and certificate of deposit rates.
Money Market: If you want a higher yield on your checking account, you can use a money market account. Money market checking is FDIC insured at participating institutions, and offers a higher yield, since those yields are based on various investments. However, you will be limited as to transactions and check writing, and your minimum required balance will be high as compared to other types of checking accounts.
If you belong to a specific demographic group, such as seniors or students, you might be able to access special deals and account features. Check with your bank to find out what’s available. You might also be able to take advantage of special rewards and bonuses, such as receiving free cash or merchandise when you sign up. Be sure to read the fine print and understand all of the requirements before committing.
Even free checking accounts come with some fees. There are fees for when you overdraw your account, and there may be other fees as well. You might be charged for arranging transactions over the phone, or for receiving paper statements. You should also be aware of fees that come when you exceed the transaction limit on your account. If your money market checking account, or some other checking account, limits your check writing, and you write more than you are allowed, the fee could be as much as $10 for each check.
Understanding the fees that could be charged, and how they are triggered, is important. It is best to look for a checking account that has minimal fees, and then to read the fine print associated with the account so that you aren’t surprised later on.
Interest Bearing Checking Accounts
For the longest time, checking accounts were simply transactional accounts whose main benefit was the ability to engage in as many transactions as possible. Now, though, some checking accounts are offering additional benefits. These benefits include rewards when you use your debit card and some even allow you to earn interest. Interest bearing checking accounts can provide a way for you to enjoy a yield on the balance that you have in your main transactional account.
Paying Interest on Your Checking Account
When banks pay interest on your checking account, they are doing so with the assumption that they will earn money. Even though you are earning interest, it usually is not a very high rate of interest. Rewards checking accounts might offer anywhere between 1% and 3% yields. However, the bank can take the money that you have deposited and lend it out at a higher rate of interest, earning money.
The interest rate for your checking account is determined in part by the Fed Funds Rate. This is the benchmark rate set by the Federal Reserve that indicates the rate that banks lend to each other overnight. This means that when the Fed Funds Rate is lower, you can expect a smaller yield on your interest checking account. As the rate goes up, however, so does the yield on your bank account.
Requirements of Interest Checking Accounts
It is important to understand, though, that most interest checking accounts have limitations. Banks are required to hold a certain amount of their deposits in reserve, so if you have a transactional account like a checking account, the bank has to keep a certain amount of that back, rather than lending it out. In order to encourage you to keep more money in your checking account (and presumably earning interest), many banks require a minimum balance on your interest checking account.
Depending on the bank, falling below the minimum balance may have different consequences. Some banks will only stop offering you an interest yield on your interest account until you get the balance back above the minimum. Other banks will charge you a fee for accounts that end up below the minimum for any portion of the month.
You should also watch out for additional fees. Some interest checking accounts come with monthly fees no matter your balance. Other interest bearing checking accounts have rewards debit cards attached; these cards often come with annual fees. Before you open any interest bearing checking account, it is a good idea to make sure you understand the terms and conditions. Read through the fine print to find out exactly what is required of you to earn the best possible interest rate, and make sure you understand what fees are charged – and when.
Interest checking accounts are great financial tools that can be of benefit to you. An interest bearing checking account can provide you with a way to make the most of your money, having it work for you. However, if you aren’t careful, the fees that come with some accounts can overcome any benefit you receive.