What is a Bank Account?
Each financial institution sets the terms and conditions for each type of account it offers, which are classified into commonly understood types, such as deposit accounts, credit card accounts, current accounts, loan accounts, or many other types of bank accounts.
A customer may have more than one account. Once an account is opened, funds entrusted by the customer to the financial institution on deposit are recorded in the account designated by the customer. Funds can be withdrawn from loan loaders.
The financial transactions which have occurred on a bank account within a given period of time are reported to the customer on a bank statement, and the balance of the accounts of a customer at any point in time is their financial position with the institution.
Related: What is a Bank and types of Bank?
Benefits of a Bank Account
If you use check-cashing outlets or the piggy bank, you’re missing out on the many benefits of managing your money with a bank account.
1. Bank accounts offer convenience
For example, if you have a checking account, you can easily pay by check or through online bill pay. It’s also cheaper than buying a money order (and you’ll have proof of bank statements that you paid your bills). If you get an Automated Teller Machine (ATM) or debit card for the account, you can withdraw money easily or make payments at stores. A debit card is usually accepted for purchases anywhere credit cards are accepted.
2. Bank accounts are safe
Your money will be protected from theft and fires. Plus, your money will be federally insured so if your bank or credit union closes, you will get your money back. The maximum amount of money that can be insured is $100,000.
3. It’s an easy way to save money
Many banks offer an interest rate when you put your money in a savings account. The interest will help your money grow over time. Be sure to shop around and check what fees are involved – you don’t want to wind up paying more in fees than you are gaining in interest.
If you have a checking and saving account with the same institution, you can have your money transferred periodically from checking to savings, putting the money aside to help grow your savings.
4. Bank accounts are cheaper
Banks and credit unions generally offer their account holders free or low-cost services:
- Cashing checks: Using a check cashing outlet really adds up. You can deposit and cash your checks at the institution where you have a bank account for free.
- Paying bills: Without a bank account, you probably rely on check cashing outlets, telephone bill pays or money orders all of which have attached fees to pay your bills. With a checking account, you can write checks for free or pay online at a low cost.
- Transferring/wiring money: If you use a money transfer company to wire money to another person’s account, you will pay a fee, usually a percentage of the amount of the transfer. Depending on the amount you want to transfer, this fee can be expensive. If you wire from your bank account to another person’s account, your bank will usually charge a flat rate that is generally lower than the money transfer company.
- Accessing cash: When you need cash but don’t have a bank account, you may decide to use a credit card to get a cash advance from an ATM. The credit card company will charge you a transaction fee and interest. If you have a bank account and an ATM or debit card, you can access your money from your own bank’s ATM for free. Although you can access your money from any ATM, you will likely pay a transaction fee if you use an ATM other than your bank.
5. Bank accounts can help you access credit
Banks and credit unions can help you access credit to acquire a home, a car, student, or personal loan because banks tend to favor existing customers, particularly those who manage their money well. Plus, going to small loan lenders that lend you cash quickly can be quite expensive because they charge lending fees and high-interest rates.
While bank accounts are preferred over check cashers and piggy banks, banks will also have fees that you should be aware of. For example, banks will charge you if you use your debit card on an ATM that is not theirs. Also, depending on the type of account you have, you must maintain a minimum balance of a certain amount to avoid being charged. It’s always best to shop around for the best product that fits your needs.
Types of Bank Accounts
Different types of bank accounts can serve different purposes, depending on your needs. Some allow you to spend or pay bills, while others are designed for short- or long-term savings. The most common types of bank accounts include:
- Checking accounts
- Savings accounts
- Money market accounts (MMAs)
- Certificate of deposit accounts (CDs)
Understanding how the different types of bank accounts compare can make it easier to decide where to keep your money.
|Account type||Why you might want it|
|Checking account||You want unlimited access to your money and you’re not concerned with earning interest.|
|Savings account||You don’t need constant access to this money and can afford to leave it in a secure account where it will earn nominal interest.|
|Money market account||You want a blend between a checking and savings to account and only need limited access to this money each month.|
|Certificate of deposit (CD)||You want a secure way to invest your money for a set period of time.|
1. Checking Account Basics
Here are some of the key features of checking accounts in general:
- Designed to hold funds you plan to spend or use to pay bills
- Typically come with a debit card for making purchases or cash withdrawals
- May come with paper checks as well
- Can be linked to other types of bank accounts, including savings accounts
It’s important to note that checking accounts aren’t all alike in terms of the features or benefits they offer. Banks can offer multiple checking account options designed to fit a variety of banking needs, including:
- Kids or teen checking
- Student checking
- Senior checking
- Interest checking
- Rewards checking
A basic checking account is generally the most common option you’ll find. With a basic checking account, you may be able to spend using a debit card, pay bills online or via paper check, and transfer funds to or from linked accounts. Basic or standard checking accounts may come with a monthly maintenance fee or have minimum balance requirements you need to meet to avoid the fee.
How to Choose a Checking Account
If you’re interested in opening a checking account, first consider whether a traditional bank or online banking makes more sense. If you don’t need branch access, then an online checking account could be a convenient way to manage your money.
Beyond that, consider the type of features you need and what you’re willing to pay for a checking account. Here’s a simple checklist of things to consider as you compare accounts:
- Minimum deposit requirements
- Minimum balance requirements
- Monthly maintenance fees
- Other banking fees, such as overdraft or ATM fees
- ATM network size and locations
- Added features or benefits, such as rewards on purchases or fee-free person-to-person payments
If you decide to switch banks, remember to update your checking account information for automatic bill payments and other recurring payments.
2. Savings Account Basics
A savings account is a deposit account that can be used to hold the money you don’t plan to spend right away. Most savings accounts pay interest on deposits, though the interest rate and annual percentage yield (APY) can vary significantly from bank to bank.
Like checking accounts, savings accounts may have minimum balance requirements and monthly maintenance fees. But they typically don’t come with a debit card or ATM card and you usually can’t write checks from them.
That’s because savings accounts aren’t designed for everyday spending or paying bills. Ordinarily, the federal Regulation Department limits you to six withdrawals from a savings account per month. These limits have been suspended indefinitely to make savings more accessible for people who may be struggling financially as a result of the coronavirus pandemic.
You should know, however, that your bank can still impose a fee for exceeding six withdrawals from savings per month. This is called an excess withdrawal fee and banks can apply it to each transaction over the six-per-month limit.
How to Choose a Savings Account
If you want to open a savings account to set aside money for short- or long-term goals, consider which type of savings account may be best. Standard or basic savings accounts from traditional banks can earn interest, though you’re more likely to pay a monthly fee if you’re opening one of these accounts at a traditional bank.
An online bank, on the other hand, may charge fewer fees and offer higher rates for savers. High-yield savings accounts, for instance, often offer an APY that’s significantly higher than the national savings APY, depending on the bank.
If you can get a better APY at an online bank, it may be worth trading the convenience of having access to a branch. As you look at different savings options and the APY you could earn, pay attention to fees and minimum balance requirements.
3. Money Market Account Basics
Money market accounts (MMAs) combine features of savings accounts and checking accounts into a single deposit account. A money market account typically allows you to earn interest on balances, and it can also offer check-writing and debit card access for spending or bill payments.
Like savings accounts, money market accounts are subject to Regulation D, which means under normal circumstances, you’d be limited to six withdrawals per month. And again, banks can charge an excess withdrawal fee for going over six withdrawals even while the rule is indefinitely suspended.
Money market accounts may have higher initial deposit limits to open and higher minimum balance requirements to maintain. A money market account, for example, may require $1,000 or more to open, while a savings account may require no minimum deposit.
You might open a money market account if you want to earn interest on the money you don’t plan to spend yet while making it convenient to eventually do so with a debit card or check. For example, you might set up a money market account to hold your down payment savings if you’re prepping to buy a home.
How to Choose a Money Market Account
Choosing a money market account is similar to choosing a checking account, in terms of fees or features. If you want a debit card or check-writing privileges, be sure to check whether a particular money market account offers those features, as not all of them do. And be sure you’ve considered the pros and cons of money market accounts.
Also, keep the minimum deposit and minimum balance requirements in mind. While you don’t necessarily need several thousand dollars to open a money market account, you may need it to earn the best APY with some accounts. That’s because banks may tier money market account interest rates, paying you a higher APY for a higher balance.
4. Certificate of Deposit Account Basics
Certificates of deposit (CDs) are time deposit accounts. When you open a traditional CD account, it’s with the understanding that you’ll leave your savings in place for a set time period. This is called the maturity term and, during this time, you’ll earn interest on your balance.
Once the CD matures, you can either withdraw your initial deposit along with interest earned or roll the entire amount over to a new CD. Banks may offer CDs with terms as short as 28 days or as long as 10 years or more. Generally, a longer-term means a higher APY. As far as savings options go, CDs can be good for the money you don’t think you’ll need right away, but they may be a poor choice for emergency funds.
With most CDs, you earn the same interest rate for the entire CD term. But bump-up CDs and raise your rate CDs to allow you to boost your rate and APY once or twice during the maturity term. Some CD owners utilize a strategy called a CD ladder to provide more flexibility by staggering the maturity dates of several CDs.
One thing to know about CDs is that withdrawing money early can trigger an early withdrawal penalty. Depending on the CD term and the bank’s policy, this fee can be a percentage of interest earned, all of the interest earned, or a flat fee. So, it’s important to read the fine print on the CD account’s terms before opening one. You can also look for a no-penalty CD that allows for penalty-free withdrawals.
How to Choose a CD Account
The most important thing to consider when choosing a CD is the maturity term and the corresponding interest rate or APY. Longer terms can offer better rates, but you’ll wait longer to tap into your savings.
Also, consider the interest rate environment in general. When rates are low across the board, online CDs may be the better option for getting the best rates. Shop around to see who offers the best combination of rates and terms.
Yes, you can open a bank account completely online, without ever going into a bank branch. With a completely online bank or account, you can also do all your account management online.
Checking accounts. Savings accounts. Money market accounts (MMAs) Certificate of deposit accounts (CDs)
In banking, an account refers to an arrangement by which a financial institution accepts a customer’s financial assets and holds them on behalf of the customer at his or her discretion. Financial institutions charge account holders interest for the privilege of borrowing money in this manner.
Some requirements for opening a bank account may include At least two forms of government-issued photo identification, such as a valid driver’s license or passport. Social security number or individual taxpayer identification number. Full contact information of the applicant, such as name, address, and phone number.
The short answer is yes. You don’t need a deposit to open a bank account if you choose a bank that doesn’t require one. A handful of online-only banks and banks with online banking do not require a deposit.