Checking Account

A checking account is a deposit account at a bank or credit union designed to make payments to other people and to receive deposits, with unlimited transactions and immediate access to the balance. Federal banking regulation reaches it two ways. It is a demand deposit, defined at 12 CFR 204.2(b)(1) as a deposit payable on demand for which the institution does not reserve the right to require seven days' written notice of withdrawal, and the regulation's own list of the forms a demand deposit may take begins with "checking accounts." It is also a transaction account under 12 CFR 204.2(e), the broader category for any account from which the holder may make payments or transfers to third parties by negotiable instrument, payment order, telephone transfer, ATM, or debit card.

The two regulatory labels are not synonyms for "checking account," and the difference explains where the account sits among its neighbors. Demand deposit is a broader family that also covers cashier's and certified checks and money orders issued by the institution. Transaction account is broader still: under 12 CFR 204.2(e)(2) it captures any account subject to check, draft, or a negotiable order of withdrawal, including a savings deposit that has been given check access and including NOW accounts authorized by 12 USC 1832(a). So the honest statement is that a checking account is one form of each category rather than the definition of either.

What follows from being payable on demand is that the bank earns very little from holding the money, and pays accordingly. The FDIC's monthly national average for interest-bearing checking runs well below its average for savings, and most checking accounts pay nothing at all. That makes the fee schedule, not the yield, the thing worth comparing. Four charges account for most of what people actually pay.

Monthly maintenance is the recurring fee for holding the account, and it is usually waivable. The FDIC describes the fee as one that "may be lower or waived in certain situations," naming direct deposit, maintaining a minimum balance, or making a certain number of transactions each month. In practice the first two are the common conditions: direct deposit of a paycheck or benefit payment above a stated amount, or a minimum daily or average balance. Some banks use a minimum transaction count instead. That is why direct deposit is the anchor of most checking relationships rather than a convenience. Overdraft and returned-item fees apply when a transaction exceeds the available balance; whether the bank pays it and charges you, or declines it and charges you, or does neither, depends on the account's terms and on choices you can usually change. Out-of-network ATM withdrawals frequently cost twice, once as a surcharge from the machine's owner and once as a fee from your own bank. Wire transfers, stop payments, and paper statements are priced separately at most institutions.

A checking account is also a poor place to hold reserves, for a reason that is behavioral rather than legal. Money in the account you pay from is the money most easily spent, and a balance carried there to avoid a maintenance fee or an overdraft earns essentially nothing while it sits. The common arrangement is a checking account sized to the month's outflows, with cash reserves held in a savings account and moved across when needed.

You open the account, deposits arrive by direct deposit, transfer, or physical deposit, and payments leave by debit card, check, scheduled bill payment, or transfer. The bank posts transactions against an available balance that can differ from the ledger balance while deposits or card authorizations are pending, which is the usual source of a surprise overdraft. Interest, if the account pays any, is credited monthly and reported on Form 1099-INT.

A hypothetical example of the real cost of a "free" account. Maya's checking account charges a $12 monthly maintenance fee, waived with at least $500 in monthly direct deposit. She changes employers, her direct deposit lapses for the year, and the fee applies every month, so $144 ($12 × 12). She makes three out-of-network ATM withdrawals, each costing $3 to the machine's owner and $3 to her own bank, so $18 ($6 × 3). Two card purchases post against a pending deposit and trigger $35 overdraft fees, so $70 ($35 × 2). The account costs her $232 for the year ($144 + $18 + $70) and paid no interest, which is a wider gap than the difference between most banks' rates.

Pros

• The only kind of account built to pay third parties directly, with no federal limit on how often.
• Money is payable on demand, with no notice period and no early withdrawal penalty.
• Insured to $250,000 per depositor, per insured bank, per ownership category.
• Direct deposit, automatic bill payment, and card access in one place, which is what makes a household's cash flow run without manual steps.

Cons

• Interest is negligible at most institutions, so any balance held above what the month requires is idle.
• Fees, not rates, drive the cost, and several of them are triggered by timing rather than by overspending.
• Available balance and ledger balance can differ while items are pending, which is how overdrafts happen to people who are tracking their spending.
• The most spendable place to keep money, which makes it a poor home for reserves.