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If you've never had a bank account before, you may wonder how it works and why you might want one for your everyday money management. Here's a quick guide on how bank accounts work and how to pick the right one for you.
What Is a Bank?
A bank is a financial institution that's authorized to hold money for customers and make the funds accessible to customers when they need it. In most cases, banks use a portion of customer deposits to make loans to other consumers. They may also offer other financial products and services such as loans and credit cards.
Many traditional banks have physical branches where customers can make deposits and withdrawals, ask questions about their accounts and do other things to manage their relationship with the bank.
Over the past couple of decades, online-only banks have become increasingly popular. While these financial institutions also offer customer support via email, live chat or phone, they don't have brick-and-mortar branches.
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Banks vs. Credit Unions
For the most part, banks and credit unions serve the same purpose. Where they are different is that banks are for-profit companies owned by shareholders—who may or may not bank with them—and credit unions are not-for-profit organizations owned by their customers, also known as members.
Because a credit union's primary objective is to serve its members, you'll often find higher interest rates and lower fees on deposit accounts, as well as lower interest rates on loans,
compared to traditional banks. Additionally, credit unions often tend to serve a small geographic area or community, which gives them a more personal touch when it comes to filling their customers' needs.
That said, online banks, which don't have the overhead costs associated with a branch network, can often offer better interest rates and fees than credit unions.
Types of Bank Accounts
There are several different types of bank accounts from which you can choose. Here are some of the most common ones you'll find.
Checking Account
A checking account makes it easy to manage your everyday money needs. You can make deposits and withdrawals, make purchases with a linked debit card, pay bills, write checks, transfer money to other bank accounts and more. You can also access your account information and history online or with the bank's mobile app.
Depending on the type of checking account you choose, you may also get access to additional features, such as ATM fee reimbursements, debit card rewards and interest on your deposits. Many checking accounts charge fees, however, especially ones offered by traditional banks.
For example, you may be charged a monthly maintenance fee—though many banks offer ways to get that charge waived. Banks may also charge you a fee if you overdraw your account, access your money using an ATM outside of its network, make or receive wire transfers or use other services.
Savings Account
While a checking account is designed for frequent use, a savings account is a place where you can store cash for short-term financial needs and goals. You'll typically earn interest on your balance, but the interest yield you get will depend on the type of savings account you choose.
Traditional savings accounts, for instance, typically offer extremely low interest rates—many traditional banks go as low as 0.01%. In contrast, high-yield savings accounts may offer much higher rates. As of October 2023, some online banks offer rates upwards of 5%.
While some savings accounts charge a monthly service fee, it's uncommon, and it's usually easy to get the fee waived. You won't get a debit card or paper checks with a savings account, but some banks may allow you to access your funds with an ATM card. Keep in mind, though, that some banks and credit unions don't allow you to take more than six withdrawals and transfers in a month. If you exceed that threshold, you may be charged a fee for each excessive transaction, or the account will be converted to a checking account.
Money Market Account
A money market account acts as a hybrid between a checking account and a savings account. You may get a debit card, ATM card and paper checks, and also earn interest on your balance.
That said, money market accounts also typically have the same six-withdrawal limit as savings accounts, so you can't truly use it for everyday banking. Additionally, these accounts often charge monthly fees, and it's not uncommon for banks to have a tiered interest rate, reserving the account's highest available rate for customers with large balances.
Certificate of Deposit
A certificate of deposit (CD) is a type of savings account that offers a fixed interest rate for a set period of time, which can range from one month to 10 years. During your account's term, you typically can't withdraw money without incurring a penalty, though some banks offer no-penalty CDs, albeit with lower interest rates.
High-yield CDs typically offer better rates than high-yield savings accounts, and their rates are fixed instead of variable. However, the withdrawal penalty can make them less appealing to consumers who want easier access to their money.
Why Use a Bank Account?
There are several benefits you can take advantage of with a bank account:
- Convenience: You can easily receive payments, pay bills, make purchases—both in person and online—and transfer money without a lot of effort. You also don't need to worry about keeping track of receipts or cash to know where your money is coming from or going.
- Security: A bank account is a secure place to hold cash. If someone accesses your account without your permission, federal laws limit your liability. Even if the bank fails, your cash is insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000 per depositor, per FDIC-insured bank in each account ownership category. The National Credit Union Administration (NCUA) similarly protects up to $250,000 for balances kept at credit unions.
- Tools: Some banks and credit unions offer extra features to help you better manage your money. Options may include a budgeting tool, spending insights, savings trackers and more.
- Access: Having a bank account can make it easier to access other financial products and services, including credit cards, loans, investment services and more.
- Planning: Whether you're trying to build wealth or simply set aside a little more money than you have been, a bank account can be a great place to store your cash for financial emergencies, short-term goals and other needs.
How to Choose a Bank
It may be tempting to simply visit a branch of a local bank or credit union—maybe one where a family member or friend is already a customer—and open an account. But with so many different options and features, it's important to take time to research and compare several options before you decide. Here are some factors to consider:
- Account options and features: Think about which types of accounts you want and check to see if the bank or credit union offers them and what features are included.
- Interest rates: If you want to maximize the interest on your deposits, consider a bank or credit union that offers high-yield accounts.
- Fees: If you want to avoid account fees, your best bet is to pick an online bank or a credit union. But if you want more features and you can get the monthly fee waived on a premium bank account, a traditional bank can still be worth considering.
- Deposit requirements: Some banks have a minimum opening deposit requirement. Depending on how much money you have and the funding options—some online banks may require a transfer from another bank—some banks may not be the right fit.
- Customer support: If you prefer in-person service or expect to make frequent cash deposits, look into banks and credit unions that have physical branches near you. However, if you don't anticipate needing support in person, an online bank can offer more value in other ways.
In some cases, it could make sense to open multiple accounts. For example, if you want the benefits of an online bank but you occasionally handle cash, you could use an online bank account for your everyday money management and an account with a local bank or credit union for cash needs—you'll be able to easily transfer money between accounts.
Additionally, some online banks that offer high-yield savings accounts may not offer great checking account features, or they may not even offer checking accounts at all. If you still want the rate the bank offers on your savings, it could make sense to have your checking and savings with different institutions.
How to Open a Bank Account
Depending on the financial institution, you may be able to open a bank account online or at your local branch. To open an account online, follow these steps:
- Visit the bank's website. Confirm that it offers the account and features that you want, and make sure you're eligible. You typically need to be at least 18 years old to open an account on your own, but minors can open one with a parent. Also, make sure you understand your funding options.
- Start the application process. It typically only takes a few minutes to apply for a bank account. You'll typically need to provide your name, date of birth, Social Security number, address and contact information. You may also need to provide a copy of your government-issued photo ID.
- Fund your newly opened account. Once you submit your application, you'll typically get a decision within seconds. Then, you'll have a chance to fund your account. Use the funding option that works best for you to get the account set up.
The Bottom Line
A bank account can come with a host of benefits and very few, if any, drawbacks. Before you open an account, though, take the time to understand your options and needs to determine the best fit.
Keep in mind that if you also want to build your credit history, a bank account won't help with that. Consider other ways to build credit from scratch and monitor your credit regularly to track your progress.