Checking Account Basics
A checking account is one of the most basic financial services available to you. It allows you to provide someone else with money when it is not safe or practical to give him/her cash. In this module, we are going to discuss everything you need to know about checking accounts.
What is a Check and How Does It Work?
A check is a written order on a financial institution, by the account holder, payable on demand to the person named on the check, or the payee. The financial institution must honor the check unless there are not sufficient funds to cover the amount.
Checks are usually personalized for you. They will have your name, address and financial institution name listed on the check. Most people add their phone number to the check as it provides another level of comfort to the person accepting your check. Additionally, the financial institution’s routing number, your account number and check number are included in different locations on the check.
Name Area: Your name and address are printed here. You can also add your telephone number.
Pay to the Order of: This line is where you write the name of the merchant or person who will receive the check.
Amount: In this box, you write the numeric amount of the check.
The Sum of: On this line you write, spelled out and in long hand, the amount of money you wish to provide to the payee.
Memo: You can add a short note for your reference in this area. For example, some people write their account number here when paying bills by check.
Date: You will need to put the date you wrote the check on this line.
Signature: You MUST sign your check in this area for it to be a legal document.
Check Number: There are two areas your check number appears: in the row of numbers at the bottom of the check and in the upper right-hand corner. The check number helps you keep track of your checks faster and easier.
Routing Number: This number identifies your financial institution for check processing.
Account Number: Your checking account number at your financial institution.
Financial Institution: The name and address of your financial institution.
Once you pay someone with a check, your check begins a long “processing” journey. Here is what typically happens:
The payee will endorse the check and deposit or cash it at their financial institution. Endorsing a check shows the financial institution that you have given permission for the check to be deposited into your account. A check must be signed on the back of the check by the payee in order for it to be accepted. If a check is written to more than one payee, all payees must endorse the check as well. For businesses, only authorized individuals may endorse the check. SAFETY TIP: You should wait until you are ready to cash or deposit the check before you endorse it.)
The payee’s financial institution will credit that person’s account.
Before the end of the day, the check will be deposited at the local Federal Reserve Branch by the financial institution. To get credit, the checks must be deposited by a certain time of the day at the Federal Reserve. The Federal Reserve will then send the check to the branch closest to your financial institution.
Your check will then go to your financial institution (or their processing firm) to determine whether or not there are sufficient funds to cover the check. If available, the amount will be withdrawn from your account and transferred to the Federal Reserve. If not, the check will be returned (or bounced) through the system. The MICR numbers at the bottom the check enable the quick and efficient travel of your check during the check payment system, or clearing process. The MICR line shows numbers that identify your financial institution, your account number and the check number.
What are the Benefits of a Checking Account?
There are many different benefits of maintaining a checking account at your financial institution. Let’s take a look at some of the most common benefits:
- Safer than Cash. Paying with a check is safer than using cash, especially when you shop in person or by mail. Cash can be taken or stolen, leaving you with no way to recover your funds. On the other hand, a check leaves you with a paper trail to help you find your missing funds. You can also place a stop payment on that check so it will never be processed.
- Proof of Payment. Checks provide written proof that you have paid someone. Each time you write a check that clears your account, there will be record of it.
- Cheaper than Money Orders. Using personal checks is much cheaper than buying money orders or cashier’s checks to pay for bills or other items.
- Ease of Access. Checking accounts provide convenient access to your funds seven days a week, 24 hours a day. You can access your money using checks, online banking, ATMs, a debit card, a telephone teller system, automatic payments to various accounts (in and out of the financial institution), and direct deposit. You will also be able to wire money when needed.
- No Transaction Limits. You can access your money as much as needed during the month as there are no Federal limits to the checking transactions you can complete.
How Can I Effectively Monitor my Checking Account?
Each month you will receive a statement that includes all of the activity on your checking account. Upon receipt of your checking statement, you should check it against your own records, or balance your checking account, within 30 days.
- Compare checks, deposits and other transactions in your check register. A check register is the tool you use to keep record of your checking account usage.
- Identify checks and other transactions that have not cleared your account. On a separate piece of paper, subtract the total amount of these transactions from your statement balance and add any deposits that haven’t cleared as well.
- Adjust your check register balance for any fees or interest incurred during the month.
- You should now be in balance! If you find any discrepancies, you should contact your financial institution immediately.
Balancing Your Account
A fast and efficient way many people balance their checking accounts is through the use of financial software, such as Microsoft Money or Quicken. Using online banking, individuals can transfer transactions and balance to the penny on a daily basis.
While everyone makes mistakes here and there, you should make every effort to only write a check when you have the funds to cover it. What is the best way to make sure you have the funds available to cover a check? Keep your check register up-to-date. Financial institutions will charge fees when an account is overdrawn (e.g., NSF Fee), and merchants will also charge fees when the check does not clear. Additionally, a history of checking abuse can prevent you from obtaining another checking account or credit at favorable rates. Furthermore, intentionally writing bad checks is considered check fraud and is a serious crime.
How Can I Protect My Checking Account?
Unfortunately, check fraud is a serious problem in the United States. You should do all you can to protect unauthorized access to your checking account.
Here are some tips to follow:
Store checks, deposit slips, monthly and quarterly statements, and cancelled checks in a secure and locked location. Unless needed for tax purposes, destroy all old cancelled checks, account statements, deposit tickets and ATM receipts. Never leave your checkbook in your vehicle (whether locked or not).
Never Share Information
Never give your checking account or any other account number to someone you don’t know, especially over the telephone. Be particularly aware of unsolicited phone calls.
Review Your Statement
Reconcile your checking statement within 30 days of receiving it to detect any irregularities. Make sure your financial institution endorses your checks and incorporates security features that help combat counterfeiting and alteration.
Secure Deposts & Payments
Never endorse a check until you are ready to cash or deposit it. Do not mail bills from an unlocked mailbox.
Write Checks With Safety in Mind
Don’t write your credit card number on your check. Use dark ink on your checks that can’t be easily erased or covered over. Avoid leaving large blank spaces in the check boxes or amount line of the check. Start written dollar amounts as far to the left as possible and put a slash between the cents and the 100. Also, draw a line between the cents value and the right side of the dollar line. Check the number sequence for each pad of checks and make sure each number matches the check register or duplicate slip as it is used. Always verify your check numbers after each shopping trip, paying close attention to the back of the pad.
Order checks from a legitimate, established company, most notably, your financial institution. You may pay a little more in the short-run, but you will be grateful for the security measures provided in the long-run. Limit the amount of personal information on your check. DO NOT include your SSN or driver’s license on your check. Examine new check packages carefully for evidence of tampering.
Taking precautionary steps like these will help prevent you from being the victim of a crime that can be devastating.
How Can I Choose the Right Checking Account?
You should take the time to choose a checking account that will best meet your financial needs. There are so many types of checking accounts available that it can be a bit overwhelming. Here are some things to consider when choosing a checking account:
- Monthly Fees. You should look at what fees are charged every month on a checking account. If possible, you should always try to find an account where there is a way to waive monthly fees. Of course, a free checking account is optimal if it has the features and benefits that you desire.
- Per-Check Fees. Some financial institutions will charge a fee for every check you write; you should try to avoid this type of account when possible.
- Minimum Balance Requirements. Some checking accounts will have a minimum balance requirement for earning interest, waiving fees or opening an account. When you shop for an account, be sure to compare the size of the minimum balance requirement with the fees being waived and/or the interest potentially earned.
- ATM Fees. Most people use an ATM to access their checking account funds. You should look for a checking account that allows you to use ATMs free no matter who owns the ATM.
- Access to Account. Of course, one of the most important features to consider is the ease of access to a checking account. Look for free Internet access, free telephone access, and free access to representatives to help you with your account questions and/or transactions.