How Do Checking Accounts Work?
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The Basics of Checking Accounts
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A checking account is a specific type of account you maintain through a bank or credit union. You place funds into the account and can then access those funds in a number of ways. Originally the primary method was by writing a check hence the name. Today, more users are reaching their funds via debit and ATM cards. There are a variety of types of checking accounts available but most work in a very similar manner.
Writing the Check
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Although fewer people are using checks today, they are still a common method for paying bills and other regular expenses. To write a check, you'll need to complete all of the sections. Make sure to use the correct date. The "Pay to the Order of" section should include the name of the company or individual who is receiving the funds. In the box, you'll write the numeric version of the amount and on the line below that you'll write out the amount using words. The line marked "For" is the memo spot and you can make a note about the purpose of the check, such as "loan" or "rent." On the final line, you'll need to sign. Always fill out the check completely before handing it over. Prior to 2004, the receiver of the check would manually send your check to his or her bank which would then send the check to your bank for payment. The process normally took 4 to 7 days to complete which gave check writers a cushion known as "float." After 2004, a law was passed which permitted companies to convert your paper check into a scanned electronic format that could be instantly transmitted to the bank clearinghouse for payment. As a result, the funds can be deducted immediately from you checking account. Individuals counting on that "float" time to cover the amount of the check could face fees.
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Using the Debit Card
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Debit cards are small cards which resemble credit cards but which are directly connected to your checking account. When you use them at a store, a hold for the amount processed is immediately sent through to your checking account to ensure the money is available for the purchase. Between 24 to 48 business hours later, the actual transaction will clear and the money will be officially removed from your account. In some cases, the hold may be for more or less than your transaction. Some gas stations, for example, may put a hold on your account for a large amount initial to ensure you have plenty to cover your gas purchase. This hold is usually removed as soon as your purchase is complete. However, if it is not you may not have access to those funds temporarily. More commonly, the gas station will only put a hold on $1 which can give you the impression that more money is available in your checking account. Remember when you use your debit card, the merchant has up to three weeks to remove the funds from your account.
Overdrawing Your Checking Account
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If you write checks or make debit purchases which can not be covered by your checking account funds, you are considered to be overdrawn. Those checks will be returned as unpaid and you will be charged a fee by your bank and by the receiver of the check. If you are a habitual writer of bad checks, you will be reported to the ChexSystems and may not be able to open a new checking account in the future. Some banks offer overdraft protection which means the money will be removed from one of your accounts at the same institution to cover the check. The service is free but you must subscribe to it and have a second account at the bank. Other banks offer a separate service that will cover your overdrawn check but you must pay the bank back, as well as the overdraft fee and the a daily charge for each day your account is not brought current.
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