Differences Between Checking and Savings Accounts

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Checking and savings accounts are the bank accounts you use most often. They both hold money for safekeeping, but they have different features, and it’s essential to understand the differences between these accounts and when to use each one.

Checking vs. Savings Accounts

  • Checking accounts are for payments. They’re ideal for money that you plan to spend soon. You can pay from a checking account in several ways, and they’re useful for online payments, in-person purchases, and electronic billing.
  • Savings accounts hold money you don’t need right away. It’s wise to separate funds that you don’t need for everyday spending, and a savings account can pay interest on money you’re not using. Although savings accounts typically pay more interest than checking accounts (which might not pay anything), it’s harder to spend money from a savings account.

    Checking Accounts

    A checking account is designed for frequent transactions, and you can use your money in a variety of ways.

    • Automatic electronic payments: If you pay regular bills, you can have funds deducted from your checking account automatically each month, eliminating the need to manually pay bills. For example, you can set up automatic mobile phone bills, mortgage payments, and insurance premiums by providing your checking account details to anybody you want to pay.
    • Debit card payments: A debit card allows you to spend from your checking account balance easily. You can swipe the card for in-person purchases or enter your card information for online payments.
    • Online bill pay with your bank: In addition to having billers deduct money from checking, you can send payments from your checking account on demand. Log in to your account and set up a payment, and your bank will mail a check or send the funds electronically.
    • ATM withdrawals: Your debit card also works at ATMs for cash withdrawals (and even deposits in some cases).
    • Paper checks: Although they’re not as popular as they used to be, checks can still be an inexpensive and easy payment option.

    Checking Account Interest

    Traditional checking accounts don’t pay interest on your account balance. However, some checking accounts pay interest, and those accounts may be appealing if you keep a significant amount of money in checking. To find interest-bearing checking, look for:

    • Online banks that pay interest on checking balances. For example, Alliant Credit Union’s High-Rate Checking account pays a modest amount of interest.
    • Local banks and credit unions with “rewards” checking accounts. Be aware that you may need to meet strict criteria to earn a meaningful amount. For example, you may need to use your debit card 12 times per month or satisfy other requirements.

    For most people, checking accounts aren’t a significant source of interest earnings. If you keep a relatively small amount in checking (or if interest rates are low), you may be better off focusing on free checking accounts that don’t drain your account balance. Calculate how much you’ll actually earn before you get too excited about interest checking.

    Checking Account Fees

    Checking accounts are notorious for charging fees. But you can dodge those fees with free checking accounts. There are two ways to bank without paying monthly charges:

    • Find a truly free checking account. To do so, check with local banks and credit unions, which may not have monthly maintenance charges. Online banks like Discover also provide free checking.
    • Qualify for fee waivers: At most banks, you can avoid fees by meeting certain criteria. For example, if you set up direct deposit into your account (from employer), you may be able to bank fee-free.

    Checking accounts charge a variety of fees:

    • Monthly maintenance charges are flat-dollar fees that come out of your balance every month. It’s hard to imagine a situation where it makes sense to pay those fees.
    • Overdraft charges are transaction fees for spending more than you have in your account. The bank might “lend” you money or allow payments to go through even when your account is empty. You need to repay those amounts, and you’ll typically pay additional overdraft charges.
    • Insufficient funds fees are similar to overdraft charges, but those might hit your account even when the bank doesn’t cover payments for you. If you try to spend more than you have, an insufficient funds fee may apply.
    • Additional fees are always possible. For example, you may have to pay ATM charges for using certain ATMs, although some banks, like Schwab Bank, rebate those fees. What’s more, some banks charge for requests like wire transfers, replacement debit cards, and stop payment requests.

    Savings Accounts

    Savings accounts are designed to keep your money safe while paying a modest amount of interest on your account balance:

    • Grow your money: Savings accounts typically pay interest, so you earn money on the cash you’re not using. Compare that to checking accounts, which usually do not pay interest.
    • Separate long-term money: If you’re saving for a rainy day or other financial goals (like a vacation or down payment), savings accounts can help. By removing funds from your checking account, you’re less likely to overspend. It can even make sense to use multiple savings accounts for various goals.

    Access Your Savings

    When you need to spend money, you can access funds in several ways. However, federal law limits how often you can make certain withdrawals from savings. You can make up to six withdrawals per month, but certain types of transactions are unlimited.

    • Transfer to checking: You can move money from your savings account to a checking account when you plan to spend. That’s almost instant if both accounts are at the same bank, and it typically takes a few days to move money from one bank to another.
    • Cash withdrawals: If you use cash and your bank provides an ATM card, you can get cash out of your savings account at an ATM. Likewise, you can visit a bank branch and request cash. You can withdraw funds with an ATM or bank teller as often as you want.
    • Request a check: Banks can also print checks payable to you. You can then deposit those checks at a different bank or credit union. There is no limit to the number of checks you receive when the checks are payable to you.

    Savings Account Fees

    Savings accounts tend to be less expensive than checking accounts, but it’s critical to review fee schedules before you open an account. Monthly fees are not very common, but ATM fees are still a reality. Plus, if you make more than six withdrawals (again, ATM withdrawals don’t count toward that limit), you may face excess-transaction fees.

    Beyond Checking and Savings Accounts

    Checking and saving accounts aren’t the only accounts available at banks. Get familiar with other options.

    Money market accounts have features of both checking and savings accounts. They often pay more than checking accounts, and they allow limited spending. Depending on your bank, a money market account might provide a checkbook, a debit card, or online bill payment options.

    Certificates of deposit (CDs) are for money that you don’t intend to spend for at least six months. CDs typically pay more than savings accounts, but you need to commit to leaving your funds untouched for six months, one year, or more. If you cash out early, you may need to pay a penalty.