Checking Accounts

Get all you pay for from your checking account.

Most of us pay our bills by check, and most of us are paid by our employers with a check. In the 1990s, more than $30 trillion each year changes hands in the form of checks. But many consumers take very little time to understand how checking works, or to find the best checking account for their purposes. Here's an overview.

Although there are a number of subtle variations in checking accounts, most of which are designed to entice you into giving your business to the advertising bank or brokerage, essentially there are only five kinds of checking accounts available to consumers. A regular checking account lets you write as many checks as you want provided you have funds in your account to cover them. Typically, a regular checking account pays no interest, and you pay a small charge to the bank for each check you write as well as a monthly service charge. At some banks, if you keep a minimum balance in your regular checking account, monthly fees and transaction charges may be waived.

Interest bearing checking accounts came into fashion in the 1970s and 1980s, when savings and loans were permitted to offer NOW accounts (NOW stands for Negotiable Order of Withdrawal). Today, just about every bank, savings and loan and credit union offers some kind of interest bearing checking account. With one of these accounts, you receive a specified rate of return when your balance meets or exceeds the bank's minimum balance requirements. Usually, this interest rate is a fraction below the rate you'd receive on a passbook savings account at the same institution. Provided you keep a minimum balance on deposit, there's usually no service charge on one of these accounts, although if you fall below the monthly minimum, service charges are often higher than what would be imposed on a regular checking account.

Money market accounts are offered by banks, and earn interest at a rate that changes with market conditions. If interest rates in general go up, so does the interest paid on your money market account. When interest rates go down, as they did during the early 1990s, the rate of return on a money market account drops as well. Generally, the minimum balance requirement for a money market account is higher than for other kinds of checking accounts, and some banks strictly limit the number of deposits you can make and the number of checks you can write each month before it begins to charge transaction fees to your account. As a result, a money market account isn't a very good choice if you plan on writing a lot of relatively small checks to pay your everyday bills.

A kind of checking account that's offered not by banks but by stock brokers and mutual funds is what's known as a money market fund account. Usually these accounts have some significant advantages over the money market accounts offered by banks and savings and loans. The interest rate on a money market fund account is usually a little higher than what a bank will offer, and few brokerages charge fees on these accounts. On the down side, you usually can't write checks for less than a minimum amount, such as $500. And since brokerage firms don't have to credit deposits as quickly as banks do, you may have to wait ten days or more before you can write a check against a recent deposit.

Stock brokerages also offer what are known as asset management accounts. To open one of these accounts, you usually have to deposit anywhere from $1,000 to as much as $25,000, depending on the brokerage. In addition, you'll usually pay an annual fee for the privilege of having one of these accounts, although you can generally write as many checks as you want each month without incurring a service charge. Asset management accounts are one way to make dividends and interest from your investments easily accessible, since your brokerage can "sweep" them into the account, where they begin to earn interest immediately. If you wait for the brokerage to mail you a check, you can lose at least several days of interest payments; with an asset management account, you begin earning interest as soon as the money is moved from an investment into the account at the brokerage.

Accounts at major brokerage firms aren't protected by FDIC coverage. Instead, they are covered by the SIPC. SIPC stands for the Securities Investors Protection Corporation, which protects brokerage accounts up to $500,000, including up to $100,000 in cash. If you are thinking about using a checking account offered by a brokerage firm, be sure that the company has SIPC coverage.

No matter what kind of checking account you open, the process of writing a check is the same. When you write a check in payment for goods or services, the person to whom you write the check usually presents it to his bank for payment. The bank then sends it to your bank, which debits (subtracts) the money from your checking account.

Until 1988, the time that could elapse between when you presented a check for payment and when your account would be credited varied from bank to bank. Since then, regulations established by the Federal Reserve Board have standardized this time period. For example, under Federal Reserve rules, if you deposit a check for $1,000 which you received from a government agency, or which was drawn on the same bank as the one where you are making the deposit, the full amount must be available to you on the next business day. If the check was drawn on an out of town bank, $100 of the total must be made available to you for withdrawal on the next business day; the bank may wait until the fifth business day after the deposit to make the remaining $900 available. Rules for other kinds of checks vary; your bank must tell you how much of the amount of any check you deposit will be available on the next business day, as well as how long you must wait before you have access to any remaining amount.

If you write a check when you don't have enough money to cover it, (what banks call "nonsufficient" or "insufficient" funds) your check can bounce. If it does, your bank can charge you a fee for the trouble it incurs in refusing to honor the check. In addition, the person to whom you wrote the check will probably be charged a fee by his bank, which he's entitled to collect from you. Bounced checks can end up costing you big money, and if you write more than one your credit rating can be seriously damaged. And if you knew that your account didn't contain enough money to cover a check you wrote, you could be charged with criminal fraud. Depending on the size of the check and the laws in your state, you could end up facing either misdemeanor or felony charges. On top of that, many states allow someone who receives a check that bounces to collect two or even three times the amount of the check as civil damages, along with court costs and attorney fees.

Just about anyone who has ever had a checking account has inadvertently bounced a check from time to time. In order to protect their customers against the hassles associated with a bounced check, many banks now offer what's known as overdraft protection. In essence, overdraft protection is a loan provided by the bank to cover a check written against an account with insufficient funds. Like other loans banks make, you'll be charged interest on the overdraft coverage your bank extends. Unlike some other loans, this protection can be extremely expensive, depending on the overdraft coverage provisions offered by your bank.

For example, suppose you have $80 in your account when you write a check for $85. The bank covers the $5 overdraft by advancing $100 into your account. You then have to repay the full $100, usually at a much higher interest rate than what the bank offers for other kinds of consumer loans. The bank may try to reassure you by only subtracting a low minimum payment from your account each month, but it may ultimately take you as long as several years to repay the loan, and that's provided that you never use the overdraft protection again. Before signing up for overdraft protection, be sure you understand the interest rate and how long it will take you to pay off the advance if you make only the minimum payments your bank requires. In some cases, it may actually be cheaper to take a cash advance against your credit card and deposit it into your checking account to cover an insufficient funds check.