Consumer Law

Bank Account Basics

A bank account is a financial account that a customer opens at a bank by depositing money into an account. The bank then keeps track of the customer's deposits, withdrawals, interest earned on the deposits, and bank account and service fees. A bank account has a positive balance when the customer has money in the account and a negative balance when the customer owes money to the bank, such as when the customer has written a check for more money than is in the account.

There are many types of bank accounts, but most fall into one of the five following categories:

  • Checking
  • Savings
  • Money market
  • Certificate of deposit
  • Plain accounts

Checking Account

A checking account allows you to deposit money, withdraw money and write checks to pay for purchases and bills. In addition to checks, most banks also provide a debit card that you can use to make purchases and pay bills. With your debit card, you can also withdraw cash and make deposits at your bank's automatic teller machines (ATM). Usually, financial institutions allow account holders to make as many deposits and withdrawals as they wish. Some banks charge service fees on checking accounts.

Savings Account

A savings account is a deposit account that earns interest (money paid to you by the bank for the use of your money). That interest is known as an annual percentage rate or APR. The APR is the amount your money will earn if left in the bank for one year. Like a checking account, a savings account also lets you make deposits and withdrawals, but savings accounts are not as flexible as checking accounts. Savings account customers may have a limit to the number of withdrawals and deposits they can make each month. Checks are not used with savings accounts but usually a debit card may be used to make deposits and withdraw funds through an ATM. A savings account lets you put away money that you want to save for later purchases or emergencies.

Money Market Deposit Account

A money market deposit account allows a customer to write checks like a checking account but it also pays a higher rate of interest than a checking or savings account on the money that is in the account. Money market deposit accounts often have higher minimum balance requirements than checking or savings accounts, but they usually pay higher interest rates for higher balances. The money you keep in the account is invested, but the bank or other institution does the investing and collects the return. Withdrawing funds from a money market deposit account is usually not as easy as it is to withdraw money from a checking account. There is often a limit to the number of transfers allowed each month. Similar to checking accounts, you usually are required to pay fees on a money market deposit account.

Certificate of Deposit (CD)

A CD account requires that the customer make a deposit and agree to leave the funds in the account for a specific amount of time, usually ranging from six months to five years. In return for this agreement, the bank pays a guaranteed interest rate as long as you do not take the money out for the agreed upon amount of timeā€”if you do, you will have to pay a penalty fee. A certificate of deposit often pays a higher interest rate than a savings account, so this account might be a good choice if you have savings that you know you won't need to touch during the term of the CD.

No-frills Bank Account

Banks often charge service fees on accounts unless you keep high balances, but most banks also offer no-frills or no-fee checking and savings accounts which allow you to access basic services such as having a debit card, writing checks, and direct deposit for your paycheck. Many times a no-frills account will let you write only a certain number of checks, and make a certain number of deposits and withdrawals in any given month. Also, interest is not paid on the money that is deposited into a no-frills account.

FDIC Insurance

Checking, savings, CD and money market deposit accounts are all insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 per depositor at any one FDIC-insured institution. The FDIC protects you against the loss of your insured deposits in the event that an FDIC-insured institution fails.

Joint Accounts

A joint account is any bank account that is owned by two or more people. Any one of the parties listed as a joint owner of the account can make deposits, write checks or withdraw cash. Either person has the right to make unlimited withdrawals, regardless of who deposited the money. Also, either person can be held liable for overdrafts and bounced checks.

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