Understanding the Different Types of Bank Accounts

Opening a bank account may be a great first step on your financial journey. However, you may wonder what type of bank account is right for you.

Four basic types of bank accounts exist, each with its own advantages. There are bank accounts that are designed to hold money that you intend to spend, while others offer a place to save money for the long term.

Let’s take a look at the four bank account types and how they work so you can decide which one is the best fit.

Checking Accounts

A checking account is a popular option for a first bank account. It is a safe place designed for holding money intended for everyday spending.

There are several ways to deposit money in a checking account. They include direct deposit, in which a payer — usually an employer — electronically transfers funds straight to the account using the bank’s routing number and your account number.

You may also deposit funds into a checking account by bringing cash or paper checks to a local bank branch or by using an automated teller machine (ATM). You may also electronically transfer money into a checking account from another account.

In addition, several options exist for withdrawing money from a checking account.

When opening a new account, the bank may issue you a debit card or a book of paper checks that may be used for making purchases. It’s also possible to withdraw cash from the account at a bank branch or ATM — or by using a debit card at a business that offers cash-back services with purchases, such as some supermarkets and convenience stores.

You may also pay for goods and services online by using your checking account or debit card numbers.

In addition, it’s possible to transfer money to and from a checking account by linking another type of bank account, such as a savings account.

What To Look for in a Checking Account

Many banks offer checking accounts. However, not all checking accounts may come with the same features and benefits.

Therefore, the first step in opening a checking account is finding one that is a good fit for your needs. Here are some considerations:

• Requirements: Some checking accounts may have minimum balance or deposit requirements. Try to select a checking account whose rules you can confidently meet.
• Fees: Some checking accounts charge monthly maintenance fees, while others do not. You may be able to avoid maintenance fees by maintaining the account’s minimum balance requirement.
• Accessibility: Do you want to bank online or visit a brick-and-mortar bank branch? While some online-only banks may offer extra benefits such as interest payments, they may not offer the level of customer service you’ll find at a traditional bank branch.
• Interest rate: Although most checking accounts don’t pay interest on balances, there are some that do pay interest as long as requirements such as a minimum balance are met.
• Rewards and other benefits: Some bank accounts offer special features such as rewards on qualifying purchases, person-to-person payment services such as Zelle®, and financial education benefits.

Savings Accounts

While checking accounts are intended to store money for the short term, savings accounts are a place to deposit funds for the long run. This type of bank account is often a good solution for saving money for a long-term goal or for maintaining an emergency fund.

Many savings accounts offer interest payments, allowing your money to grow while it remains in the account. The amount of interest you may earn may vary based on the bank and market conditions. You may earn an even higher interest rate by opening a high-yield savings account.

Savings accounts typically offer more limited ways to deposit and withdraw funds than many checking accounts. In addition, many banks limit the number of transactions you may make per month (typically, six).

When you open a savings account, the bank may give you an ATM card that may be used to make deposits and withdrawals at network machines. It’s also possible to electronically transfer money to and from a savings account.

It’s also possible to set up direct deposits and payments so that funds may move in and out of the account automatically.

What To Look for in a Savings Account

As with checking accounts, not all savings accounts are the same. Here are some aspects to consider:

• Interest rate: Interest payments are perhaps the most well-known feature of savings accounts. However, different banks may offer different rates of interest. In addition, not all savings accounts offered by the same bank may offer the same rate — or have requirements that must be met to qualify for a more favorable interest rate.
• Requirements: Your bank may have strict requirements for minimum balances. If you don’t meet the required minimum, the bank may choose to close the account.
• Fees: Some banks may charge monthly maintenance fees on savings accounts. These fees may be waived if you meet certain balance or deposit requirements.
• Accessibility: Some online-only banks offer savings accounts. However, online-only banks typically lack the kind of customer service and other personalized features that a traditional bank may offer.

Certificates of Deposit (CDs)

Certificates of deposit, or CDs, are accounts that typically offer higher interest rates than some savings accounts. However, in return for the higher interest payout, CDs require funds be locked into the account for a specified term. The term may range from a few weeks to several years, depending on the bank and CD product. Usually, the longer the term, the higher the rate of interest paid.

If you withdraw from a CD before its maturity date (the end of the CD’s specified term), the bank will likely charge a penalty, such as forfeiture of any earned interest.

Once the CD reaches maturity, you may have the option of transferring the money — including the earned interest — to another type of account or another CD. You may also be able to renew the CD for another term. However, you may not receive the same interest rate, depending on market conditions.

What To Look for in a CD

Before you open a CD, here are important points to consider:

• Interest rate: Interest rates may vary widely from bank to bank and from CD to CD. Interest rates are based on a variety of factors, including market conditions, the length of the CD term, and even special bank promotions.
• Term length: When considering opening a CD, it’s important to think about the amount of time your funds will be locked in the account. While some CDs have short durations, others may make your money inaccessible for years without penalties.
• Penalties: Many CDs impose penalties for withdrawing funds early. However, there are also penalty-free CDs that may offer lower interest rates. Consider when you’re likely to need to access the funds when choosing a CD.

Money Market Accounts

Money market accounts are similar to standard checking accounts, but they may offer additional features.

For one thing, some money market accounts offer interest rates that are higher than traditional savings accounts. That interest rate may be tiered, meaning you may be able to earn more interest for maintaining a higher balance.

Some money market accounts also come with debit cards or paper checks to access funds in the account. However, your bank may limit the number of transactions you may make per month (typically, six).

What To Look for in a Money Market Account

Here are some factors to consider before selecting a money market account:

• Interest rate: Some money market accounts may offer higher interest rates than typical checking accounts. The interest rate may vary based on the balance you maintain in the account.
• Requirements: Typically, money market accounts have stricter requirements for minimum balances and deposits than many checking accounts.
• Accessibility: Consider whether the bank allows you to access money market account funds with a debit card or checkbook.

The Bottom Line on The Different Types of Bank Accounts

As you can see, there are several kinds of bank accounts to choose from, each with its own features and functions. It’s important to recognize the comparative strengths of each. 

While a checking account may be perfect for everyday spending, savings accounts are intended for growing money over the long term. Certificates of deposit and money market accounts may be more complicated but may be rewarding for higher balances or money earmarked for a longer-term goal.

Fortunately, there’s no need to choose just one type of bank account. For instance, many new bank customers start their financial journeys with a checking account and a savings account.

This way, they may have a safe place to keep their money used in everyday transactions while saving money for important goals and earning interest in a separate account. In addition, by linking the two accounts, money may be easily transferred from one to the other. 

If you have more questions about the different types of bank accounts, feel free to contact your bank's customer service department for more information. They'll be happy to help.