How Checking Accounts Work

There are many different kinds of checking accounts. Some are for business, some for teenagers, some only exist on the Internet.But all have the same essential function. They are housed in financial institutions, such as banks and credit unions, so that you can both deposit funds and withdraw them to make payments. Unlike savings accounts and certificates of deposit (CDs), they are highly liquid. You can make unlimited deposits and withdrawal.

Because of the need to process so many transactions, checking accounts have been loss leaders for some financial institutions. They make checking accounts available in hope that they will be a kind of “starter” service which will eventually lead to applying for mortgages and purchasing CDs. However, for brick-and-mortar institutions, expenses keep increasing. That is a major reason why there has been a proliferation of fees. Those solely in cyberspace can afford to not impose fees and even throw in rewards, just like credit card companies.

Not too long ago,you made your payments primarily by writing checks. Now more transactions are done via electronic debits. For example, you can authorize many monthly bills such as insurance and mortgage to be automatically paid out of checking. You can have funds transferred from your checking account to payment services such as PayPal.

The amount in the account is called the Account Balance. However, not all of it might be available for immediate use. You might have just deposited a check for $250 which has not been cleared yet with the payer’s financial institution. Therefore, that $250 will not yet be part of your Available Balance. Ask your financial institution for a ballpark estimate how long it will take that particular check to be credited in your account.  You need to know that. That is because if you authorize a payment whose amount is more than your Available Balance, your account will be classified asoverdrawn. That could result in penalties from both your and the recipient’s financial institution. In addition, a notice is sent to ChexSystems. If that happens too frequently, the financial institution could decide to cancel your account.

Some consumers prevent that by linking their checking account to a savings account.This is often a free service but you usually have to tell the financial institution that you want that kind of overdraft protection. With online access to accounts in real time you can review the Available Balance. Before 2004, it was possible to send a payment before you had enough money in your account and still not wind up overdrawn. That is because it took about four to seven days for banks to clear the check. By that time you could have deposited the funds, such as your pay check, to cover that. That was called a “float.”  In 2004, there came a law which allowed electronic conversion of checks transmitted immediately to the bank clearinghouse and the amount deducted from your account.

Most of you consider a checking account necessary to the smooth, convenient functioning of your financial affairs. Therefore, you have to pay close attention to the Available Balance.


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