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What is a checking account and how does it work?

A checking account is a type of deposit account that can be opened at a bank or credit union, allowing you to deposit and withdraw money quickly. Here's how they work.

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Checking accounts play an integral role in many aspects of life, whether it's receiving your paycheck or transferring money to someone else.

Nearly eight in 10 (79%) U.S. adults 18 and older have a bank account, such as a checking account, according to the Fed's report on the economic well-being of U.S. households in 2019 to May 2020. Of all the kinds of bank accounts, checking accounts through a bank or credit union offer the quickest and easiest access to your money.

Below, CNBC Select reviews how checking accounts work, common fees, how they compare to savings accounts and how you open a checking account.

What is a checking account?

A checking account is a type of bank account that allows you to easily deposit and withdraw money for daily transactions. This may include depositing a check you receive, taking out cash with your debit card or setting up direct deposit for your paychecks.

Checking accounts are one of the most liquid bank accounts, meaning you have easy access to your money. They often allow unlimited deposits and withdrawals (though they may have daily maximums ranging from $300 and $5,000, depending on the bank).

The primary purpose of a checking account is to hold your money in a secure place for the short term, so it's available when you need it to pay your bills and other expenses. You can have your paycheck sent to your checking account (known as direct deposit) and then move a portion your earnings to a savings or investment account where it can grow over time.

Checking accounts shouldn't be used for long-term goals, such as saving for a house, since you earn a low interest rate, averaging about .04%. However, some banks may provide a variety of tiers for their checking accounts so there is always the chance to earn slightly more interest if you keep more money in your account.

Common checking account fees

Like most financial products, checking accounts often charge fees. Here are two of the most common (and how to avoid them):

  1. Monthly service fee: Many checking accounts, especially from major banks, charge monthly fees to maintain your account that range up to $15. You may be able to waive the monthly fee if you meet certain requirements, such as maintaining a minimum balance or setting up direct deposit. There are also no-fee checking accounts that don't have any monthly fees.
  2. Overdraft fee: If you spend more than the amount in your account, you may be hit with a steep overdraft fee averaging around $30. This can be avoided if you enroll in overdraft protection, which will decline transactions greater than your checking account balance or transfer extra funds from a linked savings account.

Don't miss: 7 common fees of checking accounts and how to avoid them

Checking vs. savings accounts

While checking and savings accounts are both types of bank accounts, they serve different purposes and the actions you can take with each vary. Here are some key differences:

  • Checking accounts come with a debit card. The debit card you receive allows you to withdraw money from your checking account. Savings accounts don't provide a debit card, though you may be able to use one to access funds if your account is linked to a checking account at the same bank.
  • Checking accounts often have unlimited withdrawals. This provides flexibility on when you can access your money, compared to savings accounts that cap withdrawals at six times a month per law.
  • Interest rates are lower for checking accounts. Since checking accounts have low interest rates averaging .04%, it's better to put large amounts of money in savings accounts with interest rates at or over 1%.

How to open a checking account

After you've chosen a checking account, it's relatively simple to open. You can sign up online or visit a local branch. You'll need to provide personal information, such as your name, address and birthday, plus your social security number.

In some cases, the bank may run a credit check, but it will likely be a soft pull that doesn't hurt your credit. You can double check the terms before opening an account to verify this.

Depending on the bank, you may be required to deposit money to open your account, which can be done by cash, check or online transfer. This can range from $1 to upwards of $50.

You should also verify that the checking account is insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). The FDIC and NCUA both provide a standard insurance amount of $250,000 per depositor, per bank or credit union. This insurance protects and reimburses you up to your balance and the legal limit in the case your bank or credit union fails.

Don't miss: 6 tips for choosing the best checking account

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.