From About Wiki, for About.com
A checking account is an account in which cash is held, usually at a bank, a savings and loan or a credit union.
Checking accounts provide a safe means of holding cash, since they alleviate the need to carry coins and bills in public. They also provide a permanent record of transactions, either through periodic account statements or through cancelled checks.
In the United States, most checking accounts are insured against the collapse of the financial institution that holds them by the Federal Deposit Insurance Corporation. a government agency that covers most accounts up to $250,000.
How Checking Accounts Work
Once a checking account holder writes a check, the financial institution where it is deposited uses a system called Check 21 to convert it into a digital image. The image might also be created by the business who accepts it under a similar system known as Electronic Check Conversion. In either case, the image is sent electronically to the check writer’s bank, which transmits funds – again, electronically – to the payee’s bank account. Once the funds are transferred, the check is said to have cleared. meaning the transaction is complete.
The amount of time it takes to clear the check is known as the float. Checking account customers sometimes try to “play the float” to their advantage by writing checks before they deposit money into their accounts to cover them. However, Check 21 has greatly reduced the amount of float time involved in most transactions, which has cut into checking account customers’ ability to play the float.
The float can work against a checking account holder if a check they have deposited later bounces, or is not honored due to the check writer’s lack of funds. Banks generally credit their own customer’s checking account as soon as a check is presented for deposit. If the check later bounces in the clearing process, the credited funds will be withdrawn, which could leave the account holder short of funds.
Free Checking Accounts
Many banks and financial institutions offer checking accounts that include a number of services, such as free debit cards, online access and unlimited check writing, but carry no periodic account charges .
Banks offer such accounts because they bring customers through the doors who might spend money on other types of services. Checking account deposits also provide the institution with inexpensive cash that can be lent out at profitable interest rates. Many banks also charge fees to checking account holders for specific actions, such as overdrawing their accounts, or using ATM machines that belong to other banks.
Free checking account holders are also sometimes required to maintain a minimum account balance to avoid additional fees.
Writing Bad Checks
Checking account holders who write checks with insufficient funds in their accounts can be reported to ChexSystems. an institution that keeps tabs on account overdrafts and reports them to other banks.
A negative mark in the ChexSystems system can stick around for up to five years, and banks might refuse to open new accounts for people with bad records.
Like a credit reporting agency, ChexSystems is covered by the Fair Credit Reporting Act. which means that people who are denied services due to a ChexSystems report have a right to know about it, and must be given a chance to clear their record of any erroneous information.
Bad checks usually stick the check writer with additional fees, both from the business they wrote the check to and from the bank that holds their checking account. Writing bad checks can also be considered a crime under certain circumstances depending on state law.
Banks sometimes offer overdraft protection. which means the bank will pay a check even if the account lacks enough money to cover it. Interest is generally charged until the money is paid back. Most banks also charge fees for each overdraft, partly to discourage abuse of the system.
Related Checking Accounts Resources
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