Checking Account – Meaning & How Does it Work?

What is a Checking Account?

A checking account is a type of bank account that allows account holders to make withdrawals or deposits. It also comes with features like electronic transfers, online banking, check registers, etc. They are typically used for daily expenses like rent, bills and utilities. 

There are some fees are associated with checking accounts, such as monthly service fees and overdraft fees. 

How Does Checking Account Work? 

Checking accounts are highly liquid bank accounts where money is stored to make or receive payments on a short term basis. 

While savings accounts have limits on how many transactions and deposits the account holder can make in a day, checking accounts do not have this limit – making them very useful to businesses, due to the volume of transactions that businesses engage in daily.

They are also useful to individuals who make frequent and high volume transactions.

Due to the highly liquid nature of checking accounts, banks and financial institutions typically do not offer interest on them. Banks also offer other features for checking accounts, like overdraft facilities, direct deposits, and more

Interest on a checking account

Interest on a checking account refers to the earnings paid by a bank to the account holder for maintaining a balance in their checking account. While checking accounts are typically used for everyday transactions like deposits, withdrawals, and bill payments, some banks offer interest-bearing checking accounts. 

These accounts allow the account holder to earn interest on the money they keep in the account, albeit at a relatively low rate compared to savings accounts or other investment options. Generally, interest-bearing checking accounts require the account holder to maintain a minimum balance to earn interest, and the rate may increase with higher balances. Interest is typically calculated daily and credited monthly, though this can vary depending on the bank’s policies.

Rewards and bonuses on checking account

Since checking accounts do not earn any interest, banks offer cashbacks and other rewards to account holders. Additionally, banks often offer new customer bonuses for opening a checking account. These bonuses can range from a few hundred dollars, but to qualify, you typically need to meet certain conditions, such as setting up a direct deposit or maintaining a minimum balance for a specific period. These promotional offers can be a good way to boost your savings if you plan to meet the requirements. However, it’s important to consider any potential fees or restrictions that come with these promotions to ensure that the benefits outweigh any associated costs.

Checking Account vs Current Account

Checking account and current account can be used interchangeably. There is no significant difference between the two terms in terms of the basic functions of the account..

“Current Account” is more commonly used in the United Kingdom, while “Checking Account” is more commonly used in the United States. In India, current account is more popular.

Both types of accounts typically offer similar features, such as the ability to deposit and withdraw money, write checks or use a debit card for purchases, and possibly earn interest or incur fees based on certain conditions.

Types of Checking Account

Standard Checking Account

A standard checking account offers basic functionality and features like debit and credit cards, online banking, chequebook, etc. They come with a minimum balance requirement and do not earn interest. These accounts are best suited for small businesses or individuals without complex financial needs.

Premium Checking Account

A basic checking account cannot keep up with fast-growing businesses, or large corporations.

A premium checking account or current account comes with features that solve medium or large-size businesses’ complex financial needs. For example, RazorpayX’s premium offering, Business Banking+ offers features like payroll, vendor management, bulk payout services, etc – in addition to the traditional features offered in a basic checking account.

Joint checking account

A Joint Checking Account is a bank account shared by two or more individuals, typically used by couples, business partners, or family members who wish to manage their finances together. All account holders have equal access to the account, allowing them to deposit, withdraw, and manage funds independently. Joint checking accounts are useful for managing shared expenses, such as household bills, rent, or business-related expenses, and can simplify money management for people who rely on each other for financial tasks.

Business checking account

A Business Checking Account is designed for businesses to manage their finances. Unlike personal checking accounts, business checking accounts cater to business transactions, including paying employees, managing business expenses, and processing payments from customers. 

They typically offer higher transaction limits and the ability to handle multiple users or signers. Business accounts may also come with additional features such as invoicing tools, merchant services, and the option to apply for business loans or credit lines. Fees and requirements can vary based on the bank and the size of the business.

Student checking account

A Student Checking Account is specifically tailored for students, typically those under the age of 24. These accounts often have no monthly maintenance fees and lower minimum balance requirements, making them an affordable option for students who may not have a steady income. 

Many student checking accounts offer convenient features, such as mobile banking and access to ATMs. Some even come with debit cards that offer cash-back rewards. These accounts may require proof of student status, and in some cases, students may be eligible for a transition to a standard checking account once they graduate.

Low Balance Checking Account

A Low Balance Checking Account is designed for individuals who have limited funds to manage in their checking account. These accounts typically have low or no monthly maintenance fees and may offer lower minimum balance requirements compared to regular checking accounts. However, some accounts may charge fees if the balance drops below a certain threshold. These accounts are ideal for people who want to avoid hefty fees and are looking for an account with minimal upkeep while still providing essential banking services like bill payments and debit card access.

Senior Checking Account

A Senior Checking Account is designed for individuals over the age of 60 or 65, offering benefits tailored to the needs of older adults. These accounts often come with perks such as no monthly fees, higher interest rates, and easier access to banking services. They may also include discounts on other financial products, such as safe deposit boxes or check orders. Senior checking accounts tend to have fewer restrictions on withdrawals and may offer features like free checks, online banking, and ATM access, ensuring that seniors can manage their finances with ease.

Second-Chance Checking Account

A Second-Chance Checking Account is intended for individuals who have a history of mismanaging their bank accounts or have faced issues like bounced checks, overdrafts, or previous account closures. These accounts are designed to help people rebuild their banking history and improve their financial standing. Second-chance accounts often come with restrictions, such as no check-writing privileges or higher fees, but they allow individuals to gain access to essential banking services, including debit cards and electronic bill payments. After maintaining a positive banking record over a period, account holders may qualify for a standard checking account.

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How to Choose a Checking Account?

The first step to managing your financing better is picking the right checking account or current account with the right provider.

Start by choosing between a traditional bank like ICICI or HDFC or a more new-age digital offering like RazorpayX, which partners with traditional banks like Yes Bank and RBL Bank. Digital solutions offer more flexibility, agility while maintaining the robust nature of traditional banking.

The next few things to keep in mind are:

• Monthly fees like maintenance fees, overdraft fees or other charges.
• Minimum balance is a requirement by most current account providers. Make sure you know the minimum requirement across banks.Read more: Why are MAB accounts better than zero balance accounts?
• Account access through various portals like a mobile app, website or in-person branches, based on your requirements.
• Extra features like accounts managers, bulk payout features, POS, etc

How to Open a Checking Account?

A founder can open a checking account offline and online. Various financial institutions offer the quick opening of this type of account with limited documentation and processing time. The process is as follows:

Step 1: Documentation
The process of opening a checking account will first require personal and professional information of the business or individual who will be the account holder. 

Step 2: Initial Deposit
Upon completion of providing the necessary information and documents, the owner will need to make the initial deposit. 

Step 3: Account Opening
Once done, the representative of the concerned financial institution will assist the entrepreneur in opening the account seamlessly. 

For those looking to open a Checking Account, RazorpayX offers business banking services that are even better than traditional checking accounts! 

RazorpayX-powered current accounts come with a plethora of features like automated payroll, effortless payment of TDS, etc. 

Benefits of Checking Account for Businesses

Checking accounts are especially useful for businesses for a number of reasons. 

1. Payment processing: A checking account makes it easy to process payments from customers, vendors, and employees, whether by check, online transfer, or debit card.
2. Record keeping: A checking account allows businesses to keep track of their financial transactions, which is essential for accounting and tax purposes.
3. Access to credit: Having a checking account with a good standing can help businesses qualify for loans and other forms of credit from financial institutions.
4. Convenience: A checking account makes it easy to manage cash flow, pay bills, and track expenses, which can save time and reduce administrative costs.
5. Security: Keeping business funds in a separate checking account can help protect against fraud and other financial risks, and can also provide a clear separation between personal and business finances.

Service Charges for Checking Accounts

Banks and financial institutions offer different types of checking accounts based on the requirements of the account holder.

The differences lie in the Minimum Average Balance and charges per transaction above the given number of free transactions.

Generally, a higher MAB gives the account holder more benefits, like a dedicated account manager, lower service charges and a higher overdraft limit. There might also be more features offered by the bank or financial institution, like payroll processing, tax payments and corporate credit cards.

Checking Account Effect on Credit

Checking Accounts can help founders get credit or funding for their businesses since banks and other financial institutions pull information from checking accounts or current accounts to determine creditworthiness.

Ensuring that there is no pending overdraft and that the account maintains the minimum account balance is a good way to maintain a healthy credit score.

RazorpayX-powered current accounts offer a great replacement for the manual financial operations of a conventional current account. Here are the following beneficial features that an individual can unlock by opting for RazorpayX: 

• Hassle-free addition of new beneficiaries with zero transfer limits
• Speedy money transfer without the requirement of multiple details 
• Facilities to schedule payments and receive reminders of payments

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