What Is a Bank Account?

What Is a Bank Account?

A bank account allows you to deposit and withdraw money as needed. You might do that in person at a local branch or transfer funds online. With a bank account, you can:

• Use ATMs to make deposits or take money out.
• Use your account to pay bills, receive your paycheck or transfer money to friends or family.
• Move money between different accounts.

If you have a checking account, you might also choose to add your debit card to your mobile wallet and make purchases right from your phone.

Learn more: What to Know Before You Open Your First Bank Account

How Does a Bank Account Work?

Using a bank account starts with opening an account and making an initial deposit. Once your account is active, you can put money in by making a cash deposit in person or at an ATM, or by transferring funds from another account. The bank then records your balance, which you can check by visiting a physical branch or ATM, logging in to your online account or using your bank's mobile app.

You'll also be able to view your transaction history, which provides an ongoing record of deposits and withdrawals. Your present balance tells you how much money is in your account at any given time, while your available balance shows how much you can actually spend after accounting for pending transactions that haven't cleared yet. Some bank accounts, like savings accounts and certificates of deposit (CDs), allow you to earn interest on your money.

Here are some common bank account terms you'll probably come across:

• Deposits: Bank deposits refer to any money you put into your account. You might do that using cash, check or electronic transfer.
• Account number: This is the number your bank or credit union assigns to your unique account. You'll want to keep this number safe to prevent fraud.
• Routing number: Your nine-digit routing number is used to identify which financial institution holds your account. You'll likely need to provide your account number and routing number when signing up for direct deposit.
• Direct deposit: This is an electronic payment method that allows funds to be transferred into your bank account automatically. You might opt for direct deposit to receive your paycheck.
• Debit card purchases: If you have a checking account, you can use your debit card to make purchases in person or online. It's safer than cash, though it won't help you build credit.
• ATM withdrawals: You can use your debit card at an ATM to take cash out of your bank account or check your account balance. ATM withdrawals are convenient, but some banks charge fees if you use an out-of-network ATM.
• ACH transfers: You can move money electronically between banks and credit unions through an ACH transfer. This can be used for paying bills, transferring funds between different accounts, receiving a direct deposit or using payment apps like Venmo.
• Checks: Paper checks aren't as common as they used to be, but it may be another way to access money in your bank account. You might use a check to pay certain bills, like your rent. You might also receive payment via check. You can deposit checks into your account at an ATM—or in some cases, with your bank's mobile app.
• Bill pay: Your bank or credit union may offer online bill pay. This can allow you to make one-time payments or schedule recurring electronic bill payments directly from your online dashboard or mobile app.

Types of Bank Accounts

There are several different types of bank accounts, and you'll likely have more than one throughout your life. Some bank accounts operate fully online, while others are linked to brick-and-mortar locations. The right one for you will depend on your financial goals and what you're looking for in a bank account.

Types of Bank Accounts

Learn more: What's the Best Type of Bank Account to Start With?

Checking Account

A checking account is designed for everyday financial transactions. Think of it as your financial home base. You can easily deposit checks and cash, receive your paycheck, transfer money to other accounts, do your online shopping and more. Checking accounts come with a debit card, but it's unlikely that your money will earn interest. You might also be charged a fee for overdrawing your account.

Learn more: Tips to Choose the Best Checking Account

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Savings Account

A savings account is meant to hold money you're setting aside for a specific reason, whether that's to build your emergency fund or save for a short-term financial goal. High-yield savings accounts are known for their above-average rates, which can help your money grow faster. One catch is that some banks and credit unions may limit how many free electronic transfers and withdrawals you can make each month. Many savings accounts don't charge fees, but some do.

Learn more: Best High-Yield Savings Accounts

Certificate of Deposit (CD)

CDs typically offer more competitive interest rates. After making an initial deposit, you'll leave the money in the account until the term ends. At that point, you'll get back your deposit, plus interest. CDs can be ideal for growing money you don't plan on using in the short term, but you can expect an early withdrawal penalty if you tap your funds before the maturity date. Terms often range anywhere from three months to five years.

Learn more: Types of CDs and How They Work

Money Market Account (MMA)

Having a money market account is sort of like having a checking account and savings account in one. You'll earn interest on your deposits without sacrificing access to your money. In fact, most money market accounts come with a debit card or check-writing abilities. Money market account interest rates also tend to be higher when compared to traditional savings accounts. But like a savings account, there may be a cap on how many free electronic transfers and withdrawals you can make each month. There might also be minimum balance requirements and other account fees.

Learn more: Money Market Account vs. Savings Account: Which Is Better?

4 Reasons Why You Should Have a Bank Account

Having a bank account is a core part of financial wellness that allows you to safely store your money. You can also earn interest on your savings. Here are four main reasons to have a bank account.

1. You Have More Payment Options

Checking accounts and most money market accounts come with a debit card. Instead of carrying cash, you can easily swipe your card when shopping in person. You can also use your account for online shopping or transferring money to friends and family. Without a bank account, your only payment options may be cash or prepaid cards, which can carry high fees.

2. You Can Sign Up for Direct Deposit

Enrolling in direct deposit can allow you to receive your paycheck faster and eliminate the hassle of having to deposit a paper check every payday. Even if you're a freelancer, many companies offer direct deposit. It may also be an option for certain government assistance programs.

3. You Can Pay Your Bills Online

Instead of mailing in a physical check to cover your household bills, you can use a bank account to pay many bills online. That includes your utilities, cellphone, student loans, credit cards and other regular expenses.

4. You Have a Paper Trail

Bank accounts provide a running record of your transactions. That can make it easy to track your spending and stick to your budget. It can also help you spot fraudulent purchases. If you're applying for a home or auto loan, having a bank account can help verify your income and expenses.

How Do Banks Protect Your Money?

Virtually all banks offer insurance that covers up to $250,000 per depositor, per insured bank and ownership category. Credit unions offer similar coverage. The risk of losing money is extremely rare. If your financial institution fails, you'll have peace of mind knowing you're covered.

How to Open a Bank Account

The process of opening a bank account varies depending on the type of account you're considering. Here's a step-by-step breakdown of what to expect.

1. Decide on a Bank and Account Type

Think about what you're looking for in a bank account. Aside from the types we mentioned above, you can also consider online-only banks versus traditional banks or credit unions. Online banks tend to offer higher rates on savings accounts, but ATM access may be limited. It really comes down to your personal preferences, financial goals and how you plan on using your new account.

2. Check for Fees

Plenty of bank accounts don't charge fees, but some do. It's wise to shop around and compare financial institutions before opening an account. Common bank fees include:

• Monthly maintenance fees
• Overdraft fees
• Out-of-network ATM fees
• Inactivity fees
• Stop payment fees
• Nonsufficient funds fees

3. Gather Your Information

Once you know which account you want to open, you can gather up the required documents. You'll likely need:

• A government-issued photo ID
• A Social Security number or taxpayer identification number
• Proof of address, such as a utility bill or mortgage statement in your name
• Money to fund your account (be sure to check if there's a minimum opening deposit requirement)

4. Submit an Application

The final step is completing the bank or credit union's account application, which you can do online or in person. Once you submit an application, you can receive a decision instantly or within a few days.

Frequently Asked Questions

The Bottom Line

Having a bank account is part of a strong financial foundation. It can provide a safe place to keep your money and can make it easier to track your spending and follow your budget. If you're setting money aside for a specific goal, a savings account can also put some muscle behind your savings. An added bonus is that most financial institutions allow you to manage your account directly from a mobile app.