Before opening a checking account, understand the advantages and disadvantages. Opening a checking account can be a big milestone, specifically for young people using it as a tool to learn and manage their personal finances.
There are several checking accounts with different features and charges. These features vary between banks.
Selecting the right checking account that suits your needs and preferences requires careful research on every checking account feature.
Whether you are financially established or starting your financial journey, there are numerous benefits checking accounts offer.
Opening a checking account early allows young individuals to learn about money management and build their financial literacy.
A young person can write checks, pay bills, plan on paying future expenses, and teach them how to be responsible with their money.
A checking account will also help start building a banking relationship with financial institutions.
Checking accounts offer overdraft facilities that allow you to make purchases, pay bills, or withdraw from your account even with insufficient funds.
Overdraft coverage will not impact your score if the bank uses its own money or link your checking account to a savings account to cover for the short. It will affect your score if you link your account to a credit card and cannot repay on time. The unpaid amount and charges will reflect on your credit card bill.
Some banks also offer overdraft products as a credit facility. Citibank, for example, has an overdraft product called checking plus. It is a revolving line of credit, and the bank reports to the credit bureaus on how their clients use this product.
Properly managing your overdraft improves your credit score, and always maintain your account balance by paying back the overdraft amount on time.
Checking accounts have several ways to avoid fees and charges, such as direct deposits and automatic bill payments. Some banks also offer free standard checks and cashier’s checks.
Some checking accounts have high interest on account balance that sometimes can match savings account interest rates.
Banks set a high minimum balance for a checking account to start earning a high-interest rate. In the long-run, you will enjoy numerous perks, grow your account balance, and have the ability to spend without restrictions (if the account balance is maintained).
Up to $250,000 of your checking account balance is insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Association (NCUA) for credit unions.
Checking accounts can easily be accessed, and can have your money any time you need it. This has eliminated the need to walk around with cash for payments.
Banks also closely monitor checking account usage and will immediately restrict access if they notice some suspicious use. This will protect your account from theft.
They have also implemented measures to safely pay bills and transfer money through mobile phones or online. You can also restrict your account if you lose your checkbook or debit card.
A paper check is now a thing of the past. Most employers and pension providers are utilizing direct deposits for their employees or clients.
First, directly deposited money is immediately available to the account holders. There is no waiting, so you save time and the hassle of visiting a bank every payday.
Second, direct deposits are free of charge. You will be saving on fees from directly depositing money into your checking account.
Some banks will also offer a higher APY for amounts deposited directly into your checking account.
Cash payments cannot be traced back in case of a dispute in the future.
The checking account has a record for every spending done. If disputes arise on payments, there is proof of payment to verify you completed your obligation. Your bank can provide copies of checks paid out or print a statement for reference.
Spending records also help you manage your finances and create a budget.
Checking accounts have multiple access points to conveniently deposit or withdraw money.
Users can access checking accounts through checks, debit cards, ATMs, mobile or online platforms. Unlike savings accounts, checking accounts usually have no limit on the number of deposits or withdrawals.
Banks do not gain much from checking accounts in terms of fees and charges. They use checking accounts to attract customers for other products like mortgages and loans.
A checking account allows you access to these loan products, which can help you build your financial life.
A checking account serves as a budgeting tool.
Automatic transfer to your savings account can help you save up and avoid spending money that’s meant saving.
You can also set an automatic bill pay function and not have to remember when your bills are due or write and post checks anymore.
If you are spending more than necessary, you can go through your statements and look over your transactions.
Like any other banking product, checking accounts has several advantages and may also pose some disadvantages to their users.
Failing to manage your checking account can lead to hefty penalties. Your checking account can also be closed, and you will be reported to consumer reporting agencies. This may deny you another checking account for over five years.
Here are some cons associated with checking accounts that you must consider before opening an account.
Strict monitoring by your bank can sometimes be disadvantageous. Banks will not hesitate to cancel a purchase, money transfer, or restrict your account if they believe that the transaction originates from someone else.
This can be inconvenient, especially if you are traveling or have an emergency.
Banks will report your account activities to ChexSystems only in a few instances, as pointed out earlier.
Banks will report careless account usages like an unpaid overdraft or fraudulent activities but not how you positively use your account.
All other responsible activities you perform with your account will most likely not reflected on your banking history.
ChexSystems will take into account your banking history, whereas credit bureaus take into account your credit history.
Transactions done through checking accounts are stored and are accessible to banks, such as spending habits and transactions.
This information is used to create targeted advertising that can become intrusive for some people.
For example, a bank notices your income has increased, and you have maintained good credit. A bank could give you a call to suggest you increase your credit limit for your credit card.
Banks usually market checking accounts as free accounts, but they are not always free. There can be costs when setting up a checking account, such as failing to maintain a minimum balance.
Even if you maintain your balance above the minimum, you can still be charged for writing checks and using your debit card. Debit card charges could be as high as 1.5% of your transaction cost.
Checking accounts are important and have more advantages compared to disadvantages. But they may not favor everyone’s needs.
A prepaid credit card or cash, for example, could be more advantageous compared to checking accounts. It is critical to thoroughly evaluate how a checking account will best suit you before opening one.
Apart from weighing the checking account advantages and disadvantages, also evaluate every bank’s terms and conditions. Some banks offer better features and perks on checking accounts than others.
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