Bank Accounts: Comparing the Types

Bank accounts are a basic part of managing your money. Nearly everyone has a bank account of some sort, and about 16% of Americans' money is held in a checking, savings, or money market account.

Because features and costs of accounts can vary greatly among institutions, it is important to shop around when seeking a new account. You should also ask questions and negotiate regarding your current account; you may discover that you do not need to pay many of the fees you are currently paying.

This article discusses the various types of bank accounts, and provides suggestions for finding the lowest-cost account that will provide you with the services you want. In addition, it tells you what you need to know about Electronic Funds Transfers — how to get the best use from ATM cards, pre-authorized transfers, and point-of-service payments.

COMPARING TYPES OF ACCOUNTS

The accounts offered by depository institutions generally fall within one of these types:

1. Checking Accounts
With a checking account you write checks to withdraw your deposited funds from the account. Checking accounts provide you with quick, convenient and frequent access to your money. You can make deposits as often as you like. Most institutions provide customers with access to an automated teller machine (ATM) for banking transactions or debit features for purchases at stores.

Some checking accounts pay interest; others do not. A regular checking account -usually called a demand deposit account-does not pay interest, while a negotiable order of withdrawal (NOW) account-does.

Various fees are charged on checking accounts. You generally must pay for the printing of your checks. Other fees vary among institutions. Some charge a maintenance or flat monthly fee regardless of the balance in your account. Other institutions charge a monthly fee if the minimum balance in your account drops below a certain amount any day during the month or if the average balance for the month drops below the specified amount. Some charge a fee for every transaction, such as for each check you write or for each withdrawal you make at an ATM. Many institutions impose a combination of these fees.

2. Money-Market Deposit Accounts (MMDA)
A money market deposit account (MMDA ) is an interest-bearing account that allows you to write checks. An MMDA usually pays a higher rate of interest than a checking or savings account. MMDAs usually require a higher minimum balance to start earning interest, and often pay higher rates of interest for higher balances.

Making withdrawals from an MMDA is less convenient than withdrawing from a checking account. You are generally limited to six transfers per month to another account or to other parties, and only three of these can be by check. Most institutions charge fees with MMDAs.

3. Savings Accounts
With savings accounts you can make withdrawals, but you do not have the flexibility of checks. As with an MMDA, the number of withdrawals or transfers per month may be limited.

Many banks offer more than one type of savings account-for example, passbook savings and statement savings. With passbook savings you get a record book in which deposits and withdrawals are entered; this record book must be presented when making deposits and withdrawals. With statement savings, the bank mails you a regular statement showing withdrawals and deposits. As with other accounts, various fees, such as minimum balance fees, may be charged on savings accounts.

4. Credit Union Accounts
Credit union accounts are similar to those at banks, but have different names. Credit union members have share draft (rather than checking) accounts, share (rather than savings) accounts, and share certificate (rather than certificate of deposit) accounts.

5. Time Deposits (Certificates of Deposit)
Certificates of deposit, or CDs, are time deposits. CDs offer a guaranteed rate of interest for a specified term, such as one year. With CDs, you can choose from among various lengths of time that your money is on deposit, ranging from several days to several years.

Once you pick the term you want, you will generally have to keep your money in the account until the term ends. Some banks allow you to withdraw the interest earned while leaving your initial deposit (the principal) in the CD. Because you are leaving your funds with the bank for a set period of time, the rate of interest is generally higher than for a savings or other account. Typically, the longer the term, the higher the annual percentage yield.

If you withdraw your principal before maturity, a penalty is usually charged. Penalties vary among institutions, and can be hefty-sometimes greater than the interest earned, eating into your principal. The bank will notify you before the maturity date for most CDs. Often CDs renew automatically.

6. Basic (No-Frill) Accounts
Basic or no-frill accounts, which may be offered by some banks, give you limited services for a lower price. Basic accounts give you a convenient way to pay bills and cash checks for less than you might pay without any account at all. Basic accounts are checking accounts, but the number of checks you can write and the number of deposits and withdrawals you can make is limited. Interest generally is not paid.