Ah, bank accounts. If you’ve been burned by having a negative balance, or a slew of overdraft fees, you probably don’t pay much attention to your account.
Think: You park your money in a bank account. You get paychecks directly deposited. You use your debit card to make purchases. You go about your life.
But do you know the difference between a savings and checking account? And do you know how bank accounts work? What’s more, do you understand the terms, products, and services that come with a bank account?
In this installment of our “Are You Really Financially Literate” series, we dig deep into the weeds with bank account terms you should know about. Take a look.
Savings vs checking account
A savings account is designed to help you save money for a rainy day, build an emergency fund, or reach a long-term money goal, like make a down payment on a car or to move to another city. Your savings account is usually limited to six transactions a month*. I know, it seems random and specific. But that’s not a rule that the bank accounts came up with. It’s coming straight from a federal regulation.
Your checking account, on the other hand, is for day-to-day spending. This means you might make a bunch of transactions regularly from your checking account.
Checking and savings accounts are both insured by the Federal Deposit Insurance Corporation (FDIC). (If you bank with a credit union, your money is insured by the National Credit Union Administration [NCUA].) The FDIC is an independent government agency that will protect your money should the bank go under. Up to $250,000 per account, per holder, is covered.
Another thing to keep in mind. You often don’t earn interest with a checking account (there are some exceptions). But with a savings account, you typically earn interest. This is expressed as an annual percentage yield, or APY.
Beyond deposit accounts
Besides savings and checking accounts, some financial institutions offer more than just deposit accounts. Here are some other common banking products:
If you’re hunting for a loan for a car, home, or to cover personal expenses like medical bills, you might be able to get a loan through a bank. And, if you have a solid, long-standing relationship with a bank, your odds of getting approved for a loan might be bolstered.
Some banks even offer incentives for taking out a loan. Let’s say you’re an existing customer and currently have a checking account. If you then take out a mortgage, the bank may give you a lower interest rate on your mortgage.
Some banks might offer investing options. For example, a bank might have a partnership with a brokerage firm. Or, you might be able to open an individual retirement account (IRA).
Mind the fees
Depending on what type of bank account you have, you might get pegged with fees. These fees might include monthly account fees, overdraft fees, ATM fees, and more.
Some banks might drop the monthly maintenance fee if you meet certain requirements. For instance, if you keep a daily minimum balance or have a linked account, then that fee may be waived. And some accounts have no hidden fees.
Each bank has different fees and requirements, so you’ll want to comb over the fine print before opening a bank account.
To credit check or not?
Some financial institutions will do a credit check before approving your account. And, if there’s a credit freeze on your account, this will need to be lifted.
Besides a credit report, financial institutions might run a ChexSystems report. This is the credit report equivalent to your banking history. What might turn up includes your overdraft history, abandoned accounts or accounts that were closed in an involuntary fashion.
Not all financial institutions, however, require a credit check. If you’re working on rebuilding your credit or have been burned by banks in the past, you might want to look for a bank that doesn’t require a credit check beforehand.