Types of Bank Accounts
One of the many lessons people learn while growing up is how to prudently handle ones relationship with money. This usually begins with going down to the local bank and opening up a bank account.
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Function
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People set up bank accounts in an effort to begin establishing credit, a means of demonstrating financial responsibility. Because dealing with a financial institution creates a record of transactions, it serves as proof of money-managing habits.
History
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The first bank in the United States was established in Philadelphia as the Bank of North America in 1781. The second bank, the First Bank of the United States, was established by the U.S. Congress in 1791. Its charter lasted twenty years.
Prior to its establishment, the original thirteen colonies, each with individual banks, operated with their own currencies and banking practices.
Throughout history there has been key legislation that shaped the way banks look today. The National Bank Act (1864) established the national banking system. National banks were chartered by the federal government, creating a "dual banking" system.
Federal Reserve Act(1913)-Signed by President Woodrow Wilson, established the Federal Reserve Banking System, called the Fed. The Fed is the banking authority of the United States. The Glass-Steagall Act (1933) established during the Great Depression, this act created the Federal Deposit Insurance Corporation which stopped banks from dealing securities. The FDIC now insures deposits up to $100,000 and IRA's to $250,000. -
Features
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Bank accounts, each with their own set of features, generally holds deposits, or credit balances. These are called deposit accounts and the transaction record reflects the current account balance as positive or negative.
If an account displays a negative balance, it means that the customer owes money to the bank, while a positive one means the bank owes money to them.
Types
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There are several types of depositor accounts:
Standard Savings are usually where people first start out. These are basic, very low-interest bearing accounts. This is an account strictly for holding and depositing money. Each bank sets the minimum balance required to open the account, that is the amount needed to establish it, and many have very low or no minimum balance at all. They do permit withdrawals, however.
Regular checking accounts are those which allow the depositor the ability to write checks against the balance. There is usually the option to obtain overdraft protection to guard against going over the amount of available funds. These accounts are low-interest bearing also.
Interest-bearing checking and savings accounts come with all the features of the traditional ones, except they earn higher interest. They do require a minimum balance, and charge fees for not doing so.
Money Market accounts earn higher interest rates (typically 2-3%) than the typical account. However, a certain balance must be maintained, or you will actually lose interest and be charged a fee. They do allow a certain number of withdrawals each month, and come with limited check-writing privileges.
Certificates of deposit (CD) are time-deposit accounts, meaning that the funds are required to be in for a fixed term, and can be withdrawn at the term's end. CD's earn a fixed rate of interest, higher than a typical bank account.
Second-chance accounts, usually traditional checking, give those who have bad credit with the banks (i.e. listed in Chex Systems) another chance at establishing a credible bank history. Second-chance accounts tend to have additional requirements, such as having to maintain a minimum balance, or agreeing to automatic payroll deposits through direct deposit.
Benefits
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Besides establishing credit-worthiness, individuals also open bank accounts to save and grow money safely, plan for retirement and college. Bank accounts can be used for cash and deposit payroll, government and third party checks, or to borrow money (loans) for large purchases, such as a home, car or college education. The accounts can also be used to start, grow and maintain a business (loans, and merchant accounts).
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