Checking Vs. Savings Accounts – What’s The Difference?

What's the difference between checking and savings accounts? Find out how each impacts the accessibility, security and earning power of your bank account, and how to find the right fit for your needs.
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women understanding the difference between checking and savings accounts

Which type of bank account do you need most: a checking or a savings account?

If you’re like many people, you need both types of accounts because each is good for a different purpose.

The following comparison of checking vs. savings accounts can help you choose the right account for specific financial situations.

How Checking and Savings Accounts Differ

Both checking and savings accounts are extremely safe types of bank accounts that allow you to access your money at any time.

The big difference is that checking accounts are designed primarily to help you make regular payments while savings accounts are better suited to building a reserve of cash for future needs.

At the heart of this difference is a legal limit of six transfers per month from a savings account to a third party (that is, someone other than the bank or yourself). Since checking accounts do not have a limit on the number of transactions you can make, they are better suited for routine transactions like paying bills.

Besides this legal distinction, checking and savings accounts each have different characteristics and features described below:

1. Interest Rates

Generally speaking, savings accounts tend to pay higher interest rates than checking accounts.

Banks can use the money you deposit with them for money-making activities such as lending. Because savings-account transactions are limited, account balances tend to be more stable and, thus, the money is readily available to the bank for purposes of making loans.

As a result, banks are able to pay a higher interest rate on savings accounts. So unless you need to use your money in the near future, it is better to keep money in a savings account than a checking account.

2. Monthly Fees

Another key distinction between checking and savings accounts is the monthly maintenance fees.

While some savings accounts charge a monthly fee, this is more the exception rather than the rule. In contrast, most checking accounts charge a monthly fee, and it isn’t cheap.

The most recent MoneyRates Checking Account Fee Survey found that nearly two-thirds of all checking accounts charge a monthly fee. The average amount of these fees is $13.47, which adds up to $161.64 per year.

3. Transfers or Withdrawals

You can withdraw money directly out of a checking account whenever you want, but the restriction on transactions applies when it comes to making payments to third parties.

Since savings accounts are limited to six third-party transfers per month, you may find they are not able to keep up with the amount of routine bill-paying you have to do. Checking accounts are well-suited to those types of frequent transactions, whether you do them by writing an old-fashioned paper check or by automatic payments or electronic transfers.

4. Safety of Account Balances

Here is one thing checking and savings account balances have in common: Both are covered by federally backed deposit insurance.

If your money is deposited in a checking or savings account at a U.S. bank, it is covered by Federal Deposit Insurance Corporation (FDIC) insurance up to $250,000. This means that, even if the bank fails and is unable pay customers back their deposits, FDIC insurance will cover those deposits.

The $250,000 limit on deposit insurance applies to your total deposits with a bank; so if you have a savings account and a checking account with the same bank and the combined balances of these accounts exceeds that limit, only $250,000 is covered.

However, you can get greater coverage if you spread your money out among multiple banks such that you have no more than $250,000 at any one bank.

If your money is with a credit union, it is covered by a similar federally backed insurance program administered by the National Credit Union Administration.

Under normal circumstances, bank failures are pretty rare – but deposit insurance can be crucial at times like the financial crisis that saw 465 bank failures in a five-year period beginning in 2008.

How Checking and Savings Accounts are Used

As referenced earlier, checking accounts are well-suited for regular flows of money in and out of your account. They give you multiple ways to pay bills efficiently, including by check, automatic payments or electronic transfers.

Savings accounts are better suited to account balances you want to remain in place and have grow over time. They can be used to accumulate savings for future needs such as a down payment on a house or retirement. They can also be used to hold an emergency fund in reserve for unexpected needs.

Alternatives to Checking and Savings Accounts

In addition to checking and savings accounts, there are other financial tools that can perform similar roles in certain situations. Here are some alternatives to consider:

Credit Cards

Because they are designed for frequent transactions, credit cards can be used for paying regular expenses instead of a checking account.

The primary drawback of credit cards is that they charge relatively high interest rates, but these can be minimized if you pay your balance off in full and on time every month.

Using a credit card when your checking account balance is running low can help you avoid risking overdraft charges, though this makes the most sense when you’re sure you’ll have money coming to you in time to pay the credit card bill by the end of the month.

Money Market Accounts

Banks invest deposits in money market accounts differently than savings account deposits; but, from a customer’s point of view, they function the same way as a savings account.

Money market accounts pay interest and are limited to six third-party transactions per month. Because money market accounts pay interest rates that are competitive with savings account rates, including them in your rate comparisons gives you more chances to find a better rate.

Certificates of Deposit

If you know you are unlikely to need your savings for a while, a CD can be a good alternative to a savings account. Certificates of deposit lock your money up for a specified period of time and, in return, they often pay higher interest rates than savings accounts.

If you can make a long-term commitment with at least some of your savings, using a CD instead of a savings account is a good way to earn more interest.

With checking accounts and savings accounts, as well as with other financial alternatives, it isn’t a question of whether one type of account is generally better than the other. It’s a question of which is the right fit for your needs.

Deciding how you need to use your money will go a long way toward determining what type of bank account you need. When you think through your different financial needs, you may well find you have need for both a savings and a checking account.

Richard Barrington, a Senior Financial Analyst at MoneyRates, brings over three decades of financial services expertise to the table. His insightful analyses and commentary have made him a sought-after voice in media, with appearances on Fox Business News, NPR, and quotes in major publications like The Wall Street Journal and The New York Times. His proficiency is further solidified by the prestigious Chartered Financial Analyst (CFA) designation, highlighting Richard’s depth of knowledge and commitment to financial excellence.
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