Types of Bank Accounts | What You Should Know Before Opening an Account

Intro: Types of Bank Accounts & What You Should Know Before Opening an Account

The average American who is just out of college or high school and learning how to handle his/her own money has probably never been taught anything about finance or learned the different types of bank accounts that are out there to choose from.

It is not uncommon for adults to go through most of their adult lives without knowing the fundamental basics of the banking world. In this article, we will address the five basic bank account types that will be useful when trying to decide where to put your hard-earned money.

The five types of bank accounts we will talk about are basic checking accounts, interest-bearing checking accounts, savings accounts, money market deposit accounts (MMDAs), and certificates of deposit (CDs).

Knowing some information about these five different bank account types will help you feel much more confident when you have to make the decision for yourself as to which account or accounts to choose.

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The 5 Types of Bank Accounts

Type of Account	Best for:
Basic Checking account	Consumers and Businesses
Interest Bearing Checking Account	Consumers and Businesses
Savings Accounts	Consumers
Money Market Deposit Accounts	Savings & Investors
Certificates of Deposit (CDs).	Investors

An Overview of Your Bank Account Options

Types of Bank Accounts: Basic Checking Account

The most familiar of the five types of bank accounts is the basic checking account. Basic checking accounts are sometimes called “no-frills” accounts because it is the simplest option that allows people to keep their money safe for a low cost. The “no frills” name comes with the basic checking account because these accounts do not have many fancy services included. A recommended basic checking account will commonly have no monthly fees, no minimum balance requirement, no transaction limits, and no ATM fees at the local bank.

The Interest-Bearing Checking Account

An interest-bearing checking account is pretty self-explanatory. It is a checking account that bears interest over time. This type of checking account usually comes at a higher cost than the basic checking account because of the extra “frills.” The interest rate on interest-bearing checking accounts is pretty low but increases with the amount of money in the account. These types of checking accounts are sometimes called a negotiable order of withdrawal (NOW) account.

Types of Bank Accounts: Savings Account

The third of the five different types of bank accounts and the second most simple to the basic checking account is the savings account. Similar to NOW accounts, savings accounts bear interest over time.

This is an incentive used for people to save their money. Savings accounts allow you to make withdrawals, but checks cannot be used to withdraw the money.

Some banks make you transfer the money from your savings account to your checking account in order to withdraw it. There is sometimes a limit on how many withdrawals can be made monthly from the savings account.

Types of Bank Accounts: Money Market Deposit Account (MMDA)

A money market deposit account is a different type of savings account that offers a higher interest rate than the normal savings account. A bank can take this money and invest it in treasury notes, bonds, CDs, etc.

Money market deposit accounts usually have a higher minimum balance than normal savings accounts. Other restrictions with money market deposit accounts will vary by bank but can include limits on withdrawals and check writing.

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Types of Bank Accounts: Certificates of Deposit (CDs)

Certificates of deposits are the last of the main five different types of bank accounts. Certificates of deposit are also known as time deposits.

With these bank account types, the one depositing the money agrees to keep the money in the account for a designated amount of time – usually between three months and six years.

The money earns a higher interest rate that increases over time because the money is inaccessible. There is a big penalty for withdrawing money early from a certificate of deposit account.

Checking Accounts in Depth

Basic checking accounts can be categorized into two different types of accounts: personal or business. The function of both personal and business checking accounts is the same; however, there are some differences. Personal checking accounts offer many incentives in order to convince people to open their account with a certain bank. Some incentives include no minimum balance, free checks, no ATM fees, and no monthly fees.

These are the incentives you want to look for when choosing a checking account for personal use. NerdWallet has come up with a list of some of the best free checking account options in 2016. NerdWallet considers its best picks by category.

Bank5 Connect is its pick for the best interest-bearing checking account because of its high-interest rate and other benefits. Ally Interest Checking was voted the best in customer service. 360 Checking by Capital One has the best overdraft policy, and Alliant Credit Union High-Rate Checking is the best credit union.

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Going back to types of checking accounts, checking accounts used for business usually have a lot less incentives because they are not trying to lure in the customer as much. The fee structure is different as well as the way the account is handled for taxes. While a personal checking account is opened using a Social Security number, a business checking account is opened using an Employee Identification Number.

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Savings Accounts in Depth

Within the realm of savings accounts, there are different types of savings accounts to look at. For example, there are passbook savings accounts and statement savings accounts. When opening a passbook savings account, the customer receives a passbook in which he/she will log all transactions and withdrawals. This record book must be present when making withdrawals. When opening a statement savings account, the bank keeps track of the transactions for the account and sends a monthly statement to the customer.

Similar to checking accounts, there is a personal and a business category for the different types of savings accounts as well. The only noticeable difference between personal savings accounts and business savings accounts is an occasional variation in interest rates as well as how the account connects to a checking account. Business savings accounts may also have a higher minimum balance requirement.

Some banks and credit unions have different types of savings accounts, such as “vacation savings, education savings, and summer savings.” All of these accounts are the same as an ordinary savings account. The tags are simply used for the customer to save his/her money in different spots for different purposes.

NerdWallet has also created a list for the best types of savings accounts of 2016. Synchrony High Yield Savings won for having the best interest rate with ATM access. Ally Online Savings won for the best interest rate and digital experience. Other best interest rate runner-ups by NerdWallet’s review include Barclays Online Savings and CIT Bank High Yield Savings. Chase Savings won the spot for the best full-service bank account with bonus.

MMDAs and CDs

Money Market Deposit Accounts (MMDAs)

Money market deposit accounts, also called money market accounts, were created in 1982 when customers were becoming unsatisfied with their interest rates and began moving their money into money market mutual funds. These mutual funds were not federally insured, though. The law began allowing banks to offer money market accounts in order to bring customers back to the banks in order for the banks to gain more clientele and, therefore, money to lend out to those customers.

Dan Geller, executive vice president at Market Rates Insight, says, “The best way to think about MMDAs is as a hybrid between checking accounts and savings accounts.” MMDAs are a type of savings account, but they have more checking options than a normal savings account. However, banks limit these options. Both withdrawals and check writing are capped monthly to a certain amount per account.

With a normal savings account, the customer will not receive a checkbook at all. Geller explains that about half of bank deposits in the United States are deposited into MMDAs because consumers are uncertain in the economy. MMDAs are a good place to keep their money while they figure out what to do next.

Certificates of Deposit (CDs)

Certificates of deposit are also under the umbrella of different types of savings accounts. Certificates of deposit can be appealing since they essentially force the consumer to keep his/her money saved. While it is possible to withdraw money from a certificate of deposit, there is a penalty, which is usually about three months in interest.

When opening a certificate of deposit, you agree with the bank on a term length in which this money will be held. The length can range from three months to six years. The longer the money stays in this type of savings account, the higher the rate. Thankfully, your interest rate is locked in at the beginning of the deposit. However, this also means interest cannot increase over time.

If more than $100,000 is deposited into a certificate of deposit, the customer can receive an even higher rate of interest by the bank. This would be considered a jumbo certificate of deposit. Keep in mind, though, that the FDIC only insures up to $250,000, so it is best not to put this much into one certificate of deposit.

How to Choose

When choosing between these five different types of bank accounts, you must first decide if you are looking for a checking account or a savings account. The different types of checking accounts include basic checking accounts and interest-bearing checking accounts. The different types of savings accounts include basic savings accounts, money market deposit accounts, and certificates of deposit.

Checking accounts will allow you to keep your money safe and insured while also allowing you to easily access the money. The cheapest option for a checking account is the basic checking account. With some research, you can find the right checking account for you that is free and offers some great incentives. If you want to accrue some interest while keeping your money in an account that is easy to use, and you don’t mind paying extra for it, consider an interest-bearing checking account.

The options within different types of savings accounts are a little broader. Choosing between a savings account, a money market deposit account, and a certificate of deposit will depend on how long you are trying to save the money for and how much interest you want to accrue on this money. A normal savings account will give you an easy way to accrue some small interest while saving your money. Having a normal savings account will also make this money easy to access in case of an emergency.

A money market deposit account is similar to a normal savings account in that the money is safe and insured, but it is also easy to access if needed. The money market deposit account accrues more interest than the normal savings account but puts stricter limits on the amount of withdrawals and transactions allowed.

For the very strict savers who want to see more interest accrued, a certificate of deposit is a more disciplined way to save your money because you will not be able to touch this money for the designated amount of time. This is the best option for the customer who really needs to save this money as well as get some interest on it.

Conclusion: Types of Bank Accounts

This article by AdvisoryHQ should help beginner bankers differentiate between the five different types of bank accounts that are out there. With some more specific research on different banks and what they have to offer, it should not be hard to take this information and go find the best bank account that works for you and your needs. Good luck in your search for the perfect fit!

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