Choosing your first bank account can feel overwhelming. There are loads of new bank account offers to pick from, each offering different benefits — high interest, cash bonuses, mobile banking apps, and so on.
How can you tell which one is right for you? The first step is to decide which type of bank account you need.
4 Common Types of Bank Accounts
There are four common types of bank accounts:
They all have their pros and cons to consider. Here’s a quick rundown of the different types and what each one has to offer.
1. Checking Accounts
Checking accounts — known in other parts of the world as debit accounts or current accounts — allow you to deposit and withdraw money at any time, as often as you want.
At one time, the biggest benefit of these accounts was that they allowed you to pay for goods and services with checks — paper slips that were presented to your bank, which handed over the funds from your account. Nowadays, paper checks are increasingly rare, but the name has stuck around.
Pros of Checking Accounts
Checking accounts offer the following benefits:
- Maximum Access: Checking accounts give you more access to your money than any other type of bank account. These days, they come with both old-fashioned paper checks and a debit card, which you can use for purchases just like a credit card and to make deposits and withdrawals at ATMs. Most checking accounts also include free online banking and online bill payments.
- Unlimited Transactions: Unlike other types of bank accounts, checking accounts allow you to make as many transactions per month as you want. This makes them a good choice for an account you plan to use to pay your everyday bills.
- Low Cost to Open: You don’t need a large amount of money to open a checking account. Nearly every bank will give you an account with a very low to no initial deposit. However, once you have the account, some banks require you to keep a certain amount of money in it to avoid fees.
- FDIC Insurance: Like all other bank accounts, checking accounts are backed by the Federal Deposit Insurance Corporation (FDIC). That means if your bank goes out of business, you’re guaranteed to get your money back, up to a limit of $250,000.
Cons of Checking Accounts
The biggest drawbacks of checking accounts are:
- Little or No Interest: According to the FDIC, as of March 2024, the average interest-bearing checking account at a brick-and-mortar bank paid only 0.07% APY (annual percentage yield).
- Maintenance Fees: Many banks charge a monthly fee, known as a maintenance or service fee, just to keep your checking account open. You can often avoid this fee by keeping a high enough balance in the account, or if you set up a direct deposit — having your paycheck automatically deposited into the account.
- Other Fees: Banks often charge a variety of other banking fees for checking accounts in addition to the maintenance fee. They can charge you a hefty fee if you overdraw your account or for using another bank’s ATM. They can also tack on fees for replacing a lost debit card or for mailing you a paper statement each month, rather than delivering it online.
Types of Checking Accounts
It’s possible to get around some of the problems with checking accounts by choosing the right type of account. Banks offer many different flavors of checking accounts with different benefits.
Some common types include:
- Free Checking: Free checking accounts do not charge a monthly maintenance fee. However, these accounts can still have other fees, such as overdraft fees. Also, they typically don’t pay interest.
- High-Yield Checking: High-yield checking accounts, also known as rewards checking, offer higher interest rates than a typical checking account.
- Student and Senior Checking Accounts: Some banks offer special deals for students and senior citizens. These accounts are free, have few fees, and pay a small amount of interest.
Alternatives to Traditional Checking Accounts
- Credit Union: A credit union is a nonprofit, so they can usually offer better interest rates and lower fees. However, they have fewer locations and a smaller network of ATMs.
- Online Bank: Online banks, which have lower overhead than brick-and-mortar banks, can also offer better interest rates if you don’t mind doing all your banking over the Internet.
2. Savings Accounts
A traditional savings account, or deposit account, is the simplest type of bank account. You can deposit and withdraw money at any time and earn interest on your balance.
Because they’re so easy to use, they’re often the first type of account many people ever have. Parents often open savings accounts for their children to teach them how to save money, and teenagers can open them to stash earnings from a first job.
Pros of Savings Accounts
The advantages of savings accounts include:
- Interest Payments: Unlike checking accounts, savings accounts always pay interest, and right now you can access 5% savings accounts to help grow your money.
- Low Opening Balance: You don’t need much money to open a savings account. Most banks require a minimum opening deposit of $100 or less, and some banks don’t require one at all.
- Easy Access: Although savings accounts don’t give you as much access to your money as checking accounts, it’s still quite easy to make deposits and withdrawals. You can go into any bank branch to deposit a check or make a withdrawal, and you can access your cash at ATMs.
- Online Access: Most savings accounts also offer online and mobile access to check your balance and see recent transactions. And, like other bank accounts, they’re fully FDIC-insured.
Cons of Savings Accounts
The major drawbacks of savings accounts are:
- Limited Transactions: The main drawback of savings accounts compared to checking accounts is that they limit the number of transactions you can make each month. You can make as many deposits as you like since banks love those, but most banks only allow six withdrawals or transfers to other accounts. If you go over this limit, the bank hits you with a fee that’s typically between $5 and $15.
- Debit Card Not Included: Unlike checking accounts, most savings accounts don’t come with a debit card you can use for purchases. That’s probably a good thing because you can only make a limited number of transactions anyway, but it does make it a little harder to use your money.
3. Money Market Accounts
A money market account (MMA), also known as a money market deposit account, combines some of the features of a savings account and a checking account. It allows you some check-writing privileges, but only a limited number of transactions each month.
Pros of Money Market Accounts
Money market accounts have the following benefits:
- Slightly Higher Interest: Money market accounts don’t pay a fixed interest rate. Instead, their yield fluctuates based on money market rates.
- FDIC Protection: A money market account isn’t the same thing as a money market fund, which is a type of mutual fund that invests in the money markets. MMAs are fully backed by the FDIC, so you can’t lose your money.
- Check and Debit Access: Unlike most savings accounts, money market accounts come with paper checks, a debit card, or both. However, as with a savings account, you can only make six check or debit payments per month.
Cons of Money Market Accounts
The drawbacks of money market accounts are:
- High Minimum Balance: Most money market accounts require a lot more money to maintain than a standard savings or checking account. However, there are a few banks that have no minimum balance requirement.
- Limited Transactions: Most money market accounts limit the number of transactions you can make by check, debit card, or online transfer to six per month. If you have an online-only account, that limit covers withdrawals as well.
- Modest Interest: Most money market accounts offer an APY of 0.55% or less. That’s better than the average rate for a savings or checking account, but it’s still not high enough to beat inflation.
4. Certificates of Deposit (CDs)
Certificates of deposit, or CDs, are different from other bank accounts. When you take out a CD, you’re basically loaning money to the bank for a fixed period of time.
In exchange, the bank agrees to pay you a fixed amount of interest when that term is up. The longer the term of the CD, the more interest it pays.
Pros of CDs
- Higher Interest Rates: The chief advantage of CDs is that they pay higher interest than other bank accounts.
- Jumbo CD Options: “Jumbo” CDs, which require an initial investment of at least $100,000, pay even more.
Cons of CDs
CDs have two major drawbacks.
- Large Opening Deposit: First of all, most banks require a fairly large chunk of money to open one.
- Money is Tied Up for a Set Time Frame: Another problem is that CDs tie up your money for a fixed amount of time. Other types of accounts let you put money in and draw it out as needed, but when you buy a CD, you can’t get that money back until the CD matures.
- Penalty Risk: Typical terms for a CD include six, 12, 18, and 60 months. If you cash in the CD before that period is up, you’ll have to pay a steep early withdrawal penalty that could eat up all the interest your CD has earned and then some.
Types of CDs
There are several ways to maximize the benefits of CDs while minimizing their downsides. These include:
- CD Ladders: One way to scale back the risks of long-term CDs is to build a CD ladder. You split the money you want to invest into several equal sums and put them into multiple CDs that mature at different times. For instance, if you have $2,000 to invest, you could put $500 each in a six-month, one-year, two-year, and five-year CD. That way, you always have one CD earning the best interest rate that’s available right now, but you also have one that will mature quickly. Then you can use the money if you need it or reinvest it in a higher-paying CD if interest rates have risen.
- Liquid CDs: Liquid CDs, also known as no-penalty CDs, allow you to withdraw some or all of your money at any time without paying a penalty. However, there are usually some restrictions as to when you can withdraw your money or how much you can take out at once. Also, liquid CDs pay lower interest rates than standard CDs. A 2020 report from Bankrate found that many short-term liquid CDs (between even and 14 months) paid between 0.1% and 0.6% APY — less than a high-interest checking account, which is fully liquid.
- Bump-Up CDs: A bump-up CD, or rising-rate CD, is another way to avoid tying up your money at a low interest rate. With these accounts, if interest rates rise, you have the option to “bump up” your earnings to the new, higher standard rate. For instance, if you open a five-year CD today at 1% APY, and by next year the standard interest rate has doubled, you can exercise your bump-up option and increase your earnings to 2% APY for the last four years.
Which Type of Bank Account Do You Need?
Here are a few questions to help you decide what kind of bank account is best for your needs:
How Much Money Do You Have?
If you have only a small amount of money to put into a bank account, savings and checking accounts are your best bets. You can open these accounts with a deposit of $100 or even less.
If you have a larger sum to stash away — say, $2,500 or more — you might earn better interest by choosing a money market account or a CD.
How Will You Use the Account?
If you plan to use the account to pay your day-to-day bills, a checking account is the best choice. You can make as many transactions as you want, and you can use checks and debit cards for purchases.
For an emergency fund, which will spend most of its time sitting and gathering interest except when you dip into it to cover an unexpected expense, a savings or money market account is a good choice.
And if you want to squirrel away a sum of money you won’t need for several months, or even several years, and let it grow as much as possible, then a CD could be a good choice.
Can You Avoid Fees?
Pretty much every bank account comes with some kind of fees attached. However, in most cases, there are ways to avoid them.
For instance, you can usually avoid maintenance fees by keeping a minimum balance in your account or by using direct deposit. Likewise, you can avoid excess activity fees by limiting the number of withdrawals and transfers you make each month.
Figure out what kind of rules you can work with, and then choose an account that fits within those limits.
Should You Open Multiple Accounts?
Keep in mind that you’re not limited to opening just one account. For instance, you can open a checking account to use for your everyday transactions, plus a savings or money market account where you keep the bulk of your savings.
Many banks make it easy to open multiple accounts and link them so that you can easily transfer money back and forth.
Final Word
Although this is a good summary of the different types of bank accounts, it’s far from a complete list of all the places it’s possible to stash your money.
For instance, you can put money into a brokerage account or a retirement account, such as an individual retirement account (IRA) or a Roth IRA. Sometimes these accounts are even available at the same bank where you have your checking or savings account.
Money inside these other types of accounts can also be invested in securities, such as stocks and bonds, which offer much higher potential returns than a CD earning 1% or 2% APY.
However, because these other accounts aren’t bank accounts, they aren’t guaranteed by the FDIC. So, while you could earn more money on these accounts, you also could lose some or all of your principal.
If you want to grow your savings and eventually reach financial independence, you can’t just keep it in a bank account indefinitely. Sooner or later, you’ll need the higher returns these other types of accounts can provide.
But if you just need a place to park your savings safely and keep them accessible when you need them, a bank account is the best place to do it.
