Also referred to as transactional accounts or demand accounts, checking accounts have become a key element of our economy and personal finances. They facilitate purchases and paychecks, and they are used to transfer funds without requiring consumers and businesses to directly handle any cash.
Increasingly, checking accounts are also being used as verification instruments, providing documentation of credit history (such as timely payments on rent or installment loans) and of income (through wage or salary deposits). And although they are named for the paper checks that authorized the transfers, many checking account transactions are increasingly done without any physical checks.
A checking account is a type of transactional account that can be held at a bank, credit union or other financial institutions authorized to provide such financial services. At its very core, checking accounts allow for two basic types of transactions: credits (deposits into the account) and debits (payments or withdrawals from the account).
These services allow account holders to send funds to other people, organizations and businesses through a check or electronic debit, as well as withdrawals for themselves. They also allow account holders to receive check or electronic payments from other people, organizations and businesses, through direct deposits.
Unlike many other financial accounts, checking accounts are considered to be very liquid. Checking account holders have access to their checking funds at almost any time through withdrawals at the bank branch, an ATM (automated teller machine), electronic debits or the check-cashing services of participating stores and businesses. By contrast, individuals with mutual fund, CD or other investment accounts may still be able to access their funds in those accounts, but there is often a delay and additional fees may be incurred for withdrawing funds from investment accounts.
Although its core function is to facilitate the transfer of funds, the checking account can also be used for various applications and situations:
The checking account has been around for many centuries, and they are believed to have been initially created as far back as the year 352 B.C. by the ancient Romans. However, it wasn’t until the early 1500s, in Holland, that checks gained widespread popularity. Dutch merchants and those who had accumulated cash began to deposit their funds with “cashiers” in return for a fee for the money’s safekeeping.
The first printed checks were created in 1762 by a British banker named Lawrence Childs. Today, banks all over the world use checks to transfer funds domestically and internationally.
In the U.S. today, licensed and chartered banks are part of a network that recognizes the checks written on accounts held by member banks. These banks use a “clearing house” such as the Federal Reserve System, to process the checks presented and ensure that funds are withdrawn from the right bank account and sent to the correct receiving account. Checks from non-U.S. banks are also presented to these clearing houses to arrange transfer of funds from various checking accounts around the world.
As checking accounts have evolved, many types and variations have emerged to meet specific consumer and business needs. Some of the different types of checking accounts that are available in the market today include the following:
While checking and savings accounts have many similarities, they also possess some very different features. The primary use of a checking account is typically for bill payment and access to liquid funds.
In many cases, banks and credit unions do not pay interest on the funds that are inside of checking accounts. For this reason, people oftentimes do not hold large balances in such accounts.
Savings accounts pay interest on their deposited funds. However, most savings accounts do not allow their holders to write checks against the funds in the account for bill payment purposes. These accounts are often used for storing more long-term funds, so consumers will usually hold more funds in a savings account than in their checking.
As crucial as checking accounts are to personal finances, many people have no checking or deposit accounts. These people fall into what is generally known as the “underbanked” community. Because they have no checking or savings accounts, these underbanked consumers often face higher expenses by way of check cashing and money order fees.
Although most Americans find it easy to open a checking account, some may face difficulty because of previous banking history. For examples, some banks may not provide checking accounts to individuals who have recently defaulted on a checking account or have a history of bouncing checks.
These obstacles are often temporary, and most individuals are able to obtain a checking account once these credit recorded events are further in the past. In the short term, consumers who cannot obtain a standard checking account may still have options:
In the past, most checking account transactions involved the physical deposit of funds and the use of paper checks in order to make payments from the account. Today, however, due in large part to the advances in electronic banking options, many consumers and businesses now use automatic and electronic features to pay routine expenses, as well as to receive incoming funds.
While there will likely always be some form of checking account available, it is anticipated that the use of paper checks will continue to diminish over time.
Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.