What is a checking account?

April 24th, 2006

A checking account is a demand deposit account held by a customer at a bank, credit union, or savings and loan association. Money that is deposited into a checking account can be accessed by writing a check against the deposits without any prior notice to the institution holding the account. Cash can also be withdrawn directly or easily transferred into a another account. Many checking accounts include an ATM or debit card. A checking account generally has very low or no interest accumulation and may have fees associated with it.

Checking accounts work by depositing your money at your savings institution. The savings institution is then obligated to return your money to you upon demand. Some accounts have a clause requiring deposits to be kept for a minimum length of time, in which case the funds will not be available for a specified amount of time after you deposit it but then is available upon demand. For checking accounts, this is generally less than a few days. The savings institution may pay you for the time that you leave your money in your checking account by paying interest, but the interest earned is usually negligible or non-existant. The savings institution may also charge fees for minimum account balances or for providing the use of the account. Your savings institution is then allowed to do whatever they want with your money while it is in the possession, such as grant loans and mortgages. Most banks and some credit unions carry insurance for your accounts which protects your deposits in the case of the bank going out of business or for any other reason when the bank would not have funds available to you to return your money.

A check written against an account is a written, negotiable instrument that includes the routing number of the savings institution that holds the account and the account number that is assigned by the savings institution. The check will normally include the check number, and will often have a MICR line written in magnetic ink printed at the bottom. There are standards that dictate the size, shape, and thickness of the paper a check is printed on, as well as where the individual elements appear on the check. However, you can technically write down all of the necessary information on just about anything and consider it a check. This is frowned upon, of course, because it would not be able to be read by machine and would require processing it by hand. This raises the costs for the banks, which indirectly raises the costs for the consumer when the banks raise their rates and fees. Every year about 600 million checks need to be processed by hand because they can not be read properly by machines. This is around 1% of the total number of checks that get processed annually.

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