Checking Accounts

This article explains what checking accounts are and how they’re used. I will cover everything from how to choose which financial institution to use for opening a checking account to how to know what fees you can expect from using a checking account.

What is a Checking Account?

A checking account is a deposit account at a financial institution that allows you to deposit money (in many cases a minimum initial deposit amount is required to set up a checking account) and withdraw that money through various mechanisms. Historically paper checks have been used. Checks are written to a recipient, who then exchanges the check for cash or deposits it into a bank account.

Compared to a savings account, which is normally used for long-term savings and which typically has many more deposit transactions than withdrawals, checking accounts are designed to be used equally for depositing and withdrawing money. In contrast, savings accounts often have limits of how many withdrawals can be done in a particular month period.

Decades ago, money could only be withdrawn from a checking account by writing a check, which was used to communicate the information (payment date, payee, payment amount, authorization signature) necessary to transfer money from the checking account owner to the payee. In the modern financial system, transferring money in or out of checking accounts can be done in lots of ways, including using physical checks and debit cards as well as through various apps (i.e. an online account manager and desktop and mobile apps) that are built to integrate with checking accounts.

How Checks Work

When you write a check, you are committing to the payee to transfer the amount indicated on the check. The payee has no way of knowing whether that personal guarantee is going to be realized until after the check is deposited. There is usually a time lag between when the check is written and delivered to the recipient and when the funds are ultimately transferred.

If the person or business that receives the check has an account at the bank from which the check is written (a situation that happens much less often than not), the check can clear almost immediately when it is cashed or deposited.

If a check is deposited at a financial institution that is not the one that issued the check, it may take as long as seven business days to process the check, but normally it takes 2 – 5 business days.

What determines how long it takes for a check to clear the bank so that the money is officially transferred? There are several factors, including:

• the amount of the check (or multiple checks) deposited by an account holder in a day; larger amounts (more than a few thousand dollars) take longer than smaller amounts
• the length of time the depositor’s account has been opened at the bank
• any flags on the depositor’s account that would indicate fraud or irresponsibility, such as a history of overdrafts

Checks and Fraud

Clearly, the intention of the depositing institution with regard to checks is to limit fraud (or irresponsibility) that could put the bank at risk and cost them money. In fact, as the integrity of people in American society in general has declined over the past several decades, and as other more secure transaction mechanisms have become available, many local businesses (restaurants, grocery stores, etc.) have stopped taking personal checks.

It’s likely that you’ve seen a sign in the drive-through at a local fast food restaurant stating that it doesn’t accept personal checks. The reason for that is simple: it is easy for a random customer going through a drive-through to write a check that won’t be honored. In other cases, such as where a trust relationship exists between a merchant and a customer, checks are accepted.

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Cryptocurrency An Improvement Upon Checking Accounts?

One of the reasons cryptocurrency is becoming more popular as a tool for exchanging money (or value) is because of the speed at which money can be transferred, and the more advanced mechanisms for establishing trust that when a commitment for money exchange is made, it will be honored.

Many experts believe that the widespread use of cryptocurrency will eventually replace many of the current functions of banks, including their roles as guarantors of money exchange through checks.

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Below is an image of the various parts of a check. I will explain the significance of these elements of a check.

1. The checking account owner’s name, address, and telephone are presented as a way of identifying who the person is writing the check, providing an opportunity to identify the check writer to establish trust.
2. The date the check was written; checks are valid for a designated time (usually 60 or 90 days) from the date the check was written.
3. Pay to the order of field: This is who the name of the payee (whether it be a person’s name or a business/organization name). When the check is deposited, the name on the checking account should match (or be very similar to) what’s in this field.
4. The amount of the check, written in decimal form.
5. The amount of the check written in word form; this field provides another way of supporting the amount that’s written in the decimal version of the amount field. The scribble after the word form of the amount field is used by people traditionally to prevent altering the amount by adding information there.
6. The name of the bank from which the check was issued.
7. The memo field gives the check writer the opportunity to note for what purpose the check was written.
8. The signature of the check writer; this signature is a verification of who wrote the check, and it should match what the bank has on file for the checking account owner’s signature. Otherwise, the checking transfer may be disputed.
9. This is the routing number of the bank from which the check was written.
10. This is the account number identifying the specific checking account from which the funds will be withdrawn.
11. This is the check number associated this specific check and shouldn’t be duplicated for specific checking account. The check number allows the checking account owner to better track the sequence of checks that have been written and deposited.

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If you’d like to get a quick education on how checking accounts originated and evolved into what they are today, take a look at the video below.

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Choosing A Bank, Credit Union, or Online Checking

In the past, you’d need to go into a local bank or credit union to open a checking account, but as the internet has proliferated in recent decades, you can actually open checking accounts online.

Deciding where to open your checking account depends upon the use cases you expect for your checking account. It’s important that you make a checklist of necessary elements of checking and match up your specific situation with a financial institution that can provide what you need. For instance, if you think you’re going to need to use cashier’s checks, online checking accounts are not going to be as useful as having a local branch that you can walk into and get a cashier’s check.

You’ll also notice when shopping around that features including in checking accounts can be as varied as the institutions who provide them.

Years ago when I was running a business that often received international wire transfers, my local bank began (for reasons they couldn’t explain, except that something wasn’t matching when the wire went through an intermediary bank) to reject incoming wire transfers from my customers. I had to go look for a new bank.

I found a checking account at my local Chase bank that waived incoming and outgoing wire transfer fees, plus they provided some other bonuses for signing up for their business checking account. I set up a new checking account with them specifically because their checking account features and offer matched what I needed.

Some things to consider when you’re looking for a financial institution to set up a checking account include:

• customer service reputation
• fees for using your checking account
• location of physical branches and ATMs
• hours of operation of branches
• features of specific checking accounts

How to Open a Checking Account

Opening a checking account involves providing identification, filling out paperwork, and making an initial deposit into the account. This process is similar for most checking accounts, including ones set up at local banks as well as online checking accounts.

Typically, this is the information that will be requested of you to open your checking account:

• Personal information, including name, address, and phone number; you’ll often need to provide proof that you live at the address you provide.
• Employment information
• Social Security Number
• Picture identification; most often a drivers license or passport is used, but other forms of government issued ID can also be used.

Earning Interest From Your Checking Account Balance

Although it is expected that a checking account will give you interest for the money that you keep in the account, in recent years interest rates for checking accounts (as well as savings accounts and even CD accounts) have been negligible, not even worth considering in contrast with other account features.

Interest rates have been meager (to say the least) over the past decade, under half a percent for the past several years. If interest rates ever rise again, it may be worth considering and comparing the interest rates of specific checking accounts you’re considering.

Checking Account Fees

Monthly fees are usually charged if you don’t maintain a minimum required balance. Monthly account fees are in the $15 to $30 range. However, if you keep the minimum daily balance (meaning that there is not a day during the month that your account drops below that balance), those fees are waived.

Other fees associated with using a checking account include:

• Overdraft fees: This happens when you write checks for more than is in your account, and your bank then pulls the money from a linked bank account, but still honors the check. Overdraft fees are normally around $10.
• Non-sufficient funds: This is similar to an overdraft fee and is incurred when you write a check for more than is available in your account. If you don’t have overdraft protection, your bank will reject the check (this is referred to a bounce), and you are charged a fee. Non-sufficient funds fees are usually $20 or higher.
• ATM fees: When you use your debit card to access funds from your checking account using an ATM that is not associated with your bank, you are charged a fee that is normally $2 to $3. Many banking institutions will reimburse those fees up to $20 or so. If you use an ATM that is associated with the bank where your checking account is located, there are normally no fees.
• Statement fees: Your financial institution may charge you to send you paper versions of your monthly statements, typically under a few dollars per months. Most banks allow (and even encourage) you to opt out of paper statements in favor of electronic ones.
• Account closure fees: Closing your account within a certain amount of time after you’ve opened it (typically the first three to six months) may subject you to account closure fees, which are typically in the $25 range.

Most Popular Banks for Checking Accounts

The most popularly used checking accounts are with the largest banks in the country, including Chase, Wells Fargo, and Bank of America. Each of those banks has checking accounts for both personal and business checking purposes. I will include images of their current marketing offers below so you can get a feel for how they compare.

Chase Bank Checking Accounts

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Wells Fargo Checking Accounts

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Bank of America Checking Accounts

These examples are intended to give you an idea of what the major banks are offering for checking accounts. You can the features, fees, and other aspects of banks that have to compete with each other to win your business and attract you to their checking accounts. You can use this information to compare to a local bank or credit union you may also be considering to open a checking account.