Checking account

Definition

A checking account is a financial account held at a bank or credit union that is designed for everyday transactions and easy access to funds.

What is a checking account?

A checking account allows account holders to deposit money, make withdrawals, write checks, and conduct various electronic transactions. It serves as a central hub for managing day-to-day financial activities.

Deposits and withdrawals:

1. Deposits: Account holders can deposit money into their checking accounts through various methods, such as cash, checks, direct deposits, or electronic transfers.
2. Withdrawals: Funds can be withdrawn from a checking account using methods such as checks, ATM withdrawals, electronic transfers, or debit card transactions.

Checking accounts typically include a checkbook, allowing account holders to write checks as a form of payment. Checks are written to specific payees and can be used for various transactions, including bill payments and purchases. Furthermore, many checking accounts come with a debit card, which can be used to make purchases, withdraw cash from ATMs, and conduct point-of-sale transactions. Debit card transactions are directly linked to the checking account balance.

Some checking accounts offer overdraft protection, a service that helps prevent transactions from being declined if the account balance is insufficient. Overdraft protection may involve linking the checking account to a savings account or a line of credit.

Checking accounts often incorporate security features to protect against unauthorised transactions. Account holders are typically protected by fraud monitoring, and many banks offer zero-liability policies for unauthorised transactions.

Types of checking accounts

Different types of checking accounts include:

• Basic checking accounts: These offer standard features like check writing and debit card access, suitable for everyday transactions without many additional perks.
• Interest-bearing checking accounts: These accounts pay interest on the balance, combining the features of a checking account with the benefits of a savings account, though they may require a higher minimum balance.
• Student checking accounts: Designed for students, these accounts often have lower fees and no minimum balance requirements, catering to the financial needs of young adults.
• Joint checking accounts: Shared by two or more individuals, these accounts are ideal for couples or business partners to manage shared expenses.
• Business checking accounts: Tailored for business owners, these accounts handle higher transaction volumes and may offer additional features like merchant services or payroll processing.
• Second chance checking accounts: For individuals with a poor banking history, these accounts provide an opportunity to rebuild a positive record, often with some restrictions and higher fees.
• Premium checking accounts: Offering enhanced benefits like higher interest rates, free financial advice, or waived fees, these accounts usually require a substantial minimum balance.

Checking account vs. savings account

A checking account and a savings account serve different financial purposes. A checking account is designed for frequent transactions, such as paying bills, making purchases, and withdrawing cash, often offering unlimited transactions and features like debit cards and check writing. A savings account, on the other hand, is intended for storing money and earning interest over time, typically with limited monthly withdrawals. While checking accounts offer easy access to funds for daily use, savings accounts prioritise growing your balance through interest accumulation, making them better suited for long-term financial goals.

Example of checking account

John Doe opens a checking account at ABC Bank to manage his day-to-day financial transactions.

1. Initial deposit:
   • To activate the checking account, John makes an initial deposit of £500. This amount is the opening balance in his checking account.
2. Direct deposit:
   • John sets up direct deposit with his employer, so his monthly salary of £2,500 is directly credited to his checking account.
3. ATM withdrawals:
   • John occasionally withdraws cash from ATMs using his debit card when needed. The withdrawn amount is deducted from his checking account balance.
4. Online banking:
   • John uses online banking to check his account balance, review transactions, and transfer funds between his checking and savings accounts.
5. Overdraft protection:
   • To avoid overdrafts, John opts for overdraft protection linked to his savings account. If his checking account balance falls below a certain threshold, funds are automatically transferred from his savings account to cover the shortfall.