What are checking accounts?

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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.

Transactional account services

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.

Other ways checking accounts are used

Although its core function is to facilitate the transfer of funds, the checking account can also be used for various applications and situations:

  • Verification of payment history. Many lenders and creditors will sometimes use checking accounts as an alternative form of credit or loan verification. A prime example is the verification of rental history. Most landlords and property managers don’t bother reporting payment history to credit bureaus (unless they’re pursuing a collection). Renters buying their first homes are often required by mortgage lenders to prove timely rent payments. The best way is to provide canceled checks or copies of six to 12 months of checking account statements, showing when rent payments were made.
  • Verification of assets. Many lenders require borrowers to show sufficient assets and reserves to qualify. Bank and checking account statements are often used to show the presence of those funds. Some lenders may also require at least three consecutive months of checking or bank account statements to show that loan applicant has actually had those funds for a while (and didn’t recently borrow them).
  • Verification of income. Some creditors and lenders also use checking account statements to verify that the borrower has sufficient income to qualify for the loan. By adding up all the deposits, especially from possible employers, lenders can determine how much money the borrower has actually been receiving each month.
  • Verification of identity. Because most banks require borrowers to provide proof of identity before providing a checking account, those accounts are sometimes used as additional evidence to confirm someone’s identity.
  • Bill payment. Many banks now offer bill payment options for checking account holders. Through this feature, the bank handles the payment of recurring and isolated expenses.
  • Check cards. Many banks now also provide checking account customers with a debit or check card that is part of the MasterCard or Visa network. These check cards can be used at any business on the selected network. Unlike a credit card, however, these check cards immediately pay for purchases with the funds in the checking account.

A brief history of the checking account

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.

What are the different types of checking accounts?

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:

  • Basic checking. Basic checking accounts allow their holders a place to “store” funds that will be used for paying bills and other expenses. Some banks require that a minimum balance be held in the account, as well as impose a monthly check writing limit. Otherwise, the account holder may be subject to a fee.
  • Free checking. Free checking accounts are those that do not impose a monthly service fee, although this may sometimes be tied to a minimum balance requirement. These checking accounts will not typically offer any type of interest on the funds that are stored in the account.
  • Interest-bearing checking. Consumers who hold an interest-bearing checking account may receive interest earnings on the funds maintained in the account. These accounts typically require that a minimum balance be held in the account throughout the entire statement period.
  • Business checking. Businesses, in particular, rely on checking accounts. From payroll and vendor payments to receiving customer payments and paying taxes, business accounts are used heavily. Business accounts typically charge a fee and may offer features and benefits designed for businesses.
  • Student checking. Many banks provide special checking accounts to those who are students and using personal bank accounts for the first time. These student accounts often waive the minimum balance requirements and monthly account fees, while still providing ATM privileges.

Comparing checking and savings accounts

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.

Options for consumers who have been denied by banks

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:

  • Credit unions. Many credit unions have more flexible guidelines for approving checking account applications from its members. For those who can qualify with a credit union in their area, this is often the best alternative to traditional bank checking accounts.
  • Savings account. Although many banks and credit unions may not offer checking accounts to borrowers with damaged checking history, they may be more willing to provide savings accounts. Although savings accounts do not provide checks, they do allow the savings account holder to receive and cash checks, as well as withdraw funds through an ATM or even transfer funds via ACH.
  • Restricted bank accounts. An additional option that some banks provide is restricted checking accounts, which are closely monitored by the issuing bank. These accounts typically have very limited services, but do allow their holders to withdraw and deposit funds, although many do not provide use of ATM or debit card options.
  • Prepaid credit card. Many prepaid credit cards create a checking account for the account holder, which is then tied to the prepaid debit or credit card. Even without a checking account option, prepaid credit and debit cards allow consumers without a bank account to access funds and to pay bills using the card.

The future of checking accounts

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.

  • ACH. One type of electronic banking is the Automated Clearing House, or ACH. This system processes debit and credit transactions in large batches, including direct deposit for payroll funds, as well as vendor payments. This type of paperless transaction has become exceedingly popular over the past decade.
  • Electronic transactions. Electronic fund transfers, also known as EFTs, are transactions that include wire transfer, electronic bill payment with online banking and direct debit payments (often referred to as electronic checks or e-checks).

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.

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