Most banking institutions offer a wide range of personal account products, and deciding which one is most appropriate can be a challenge. Personal bank accounts generally fall into one of the following categories:
- Checking accounts
- Savings accounts
- Money market accounts
- Certificates of Deposits (CDs)
Knowing the distinctions among these account types can be highly valuable when comparison shopping for the most advantageous terms at competing banks.
The checking account is one of the most popular types of bank accounts, and can take multiple forms, depending on the needs of the customer. A basic checking account allows individuals to conduct simple transactions by using checks or electronic transfers, but generally does not bear interest.
The lowest-cost versions of such accounts offered typically place restrictions on the number of checks that may be processed monthly before a fee will be charged. An interest checking account offers more extensive privileges, but also is more expensive to maintain.
Customers accrue interest based on the size of their checking account balance, and likely enjoy the freedom to write an unlimited amount of checks each month. In some cases, however, fees may be assessed if the account balance dips below a required level.
The savings account is a banking tool meant to encourage the building of personal financial reserves. Customers with a savings account have the ability to deposit and withdraw funds, though they cannot access their money by writing checks.
These accounts generally bear a higher interest rate than checking accounts, though a lower rate than some other types of personal accounts. In fact, some online savings accounts offer a yield many times higher than that of a brick and mortar bank. Such is Financial institutions vary as to whether a fee will be assessed when a customer’s savings account balance falls beneath a designated value.
Money Market Accounts
Money market accounts provide customers with a greater rate of interest than checking and savings accounts generally do, because the financial institution holding the account invests their balances in short-term debt instruments, including Treasury bills, certificates of deposit and other types of securities.
Banks typically require higher minimum deposits in order to open this type of account, and customers are restricted in the number of transactions they can make from such accounts. Only six total transfers may be made from this type of account each month, just three of which can be done via checks.
Certificates of Deposit (CDs)
Certificates of deposit (CDs), alternatively referred to as time deposits, are essentially bank accounts in which the customer has pledged to leave their funds untouched for a stated period of time in exchange for significantly higher interest rates than those offered by other types of personal accounts.
The maturation period for CDs can range from months to years. The longer a customer agrees to forgo access to their funds, the greater the interest they will ultimately receive. In most instances, substantial penalties are imposed on customers who wish to withdraw their funds prior to a CD’s maturity date. Therefore, such accounts are advisable only for those who will not need to spend their balances in the near term.
Each of these four popular types of personal bank accounts is insured by the Federal Deposit Insurance Corporation (FDIC) in the amount of $100,000 per account.
While almost all banks and credit unions offer every one of the aforementioned account categories, their respective rates, terms and conditions are likely to vary. Understanding the features and benefits of each account type enables consumers to choose the one best suited to their needs.