What Are the Different Types of Bank Accounts to Consider?

 

A bank account is a bank account no matter where you go, right?

Not quite.

Just as there are different types of banks with different benefits, there are multiple types of accounts that you can open. Having a bank account or credit union account is an integral part of managing your finances, so it’s important to be aware of the options available to you. 

Before opening a bank account, some factors to consider are the minimum balance requirements, fees, interest, and the overall convenience of banking with a particular bank. 

Most importantly, you need to determine the kind of bank account you want. But you can only do that if you’re aware of the types that are available. 

What Are the Four Major Types of Bank Accounts?

Most banks offer four types of accounts, though some larger banks may offer up to six.

The four major types of bank accounts that you can expect to find at your local bank or credit union are:

1. Checking accounts
2. Savings accounts
3. Money Market accounts
4. Certificates of Deposit (CDs)

Larger banks, conglomerates, and affiliates often offer two additional account types:

1. Individual retirement accounts (IRAs)
2. Brokerage accounts

While most people typically associate these types of accounts with investing and traditional brokerages, more and more banks are offering them to their customers.

Let’s break down why you might want a specific account type over another.

Checking Accounts

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For most people, a free checking account is considered “home base.” This type of account essentially provides unlimited access to your money in exchange for little to no interest, though there are “premium” checking accounts that do offer interest if you maintain a high balance. It’s an easy account for people to deposit paychecks, pay bills from, and access when they need money quickly. 

A checking account comes with a debit card, which works similar to cash and a credit card. When you go to a grocery store or gas station, you can swipe the debit card like a credit card, but instead of accruing a balance, the money is deducted from your checking account. Keep in mind that some transactions may take several business days to process, so it’s especially important to track your spending with a debit card or else you may accidentally double spend the money!

Two key features you should consider when looking for a checking account are (1) the ability to direct deposit and (2) online banking through either an app or the bank’s website. Though these features are increasingly standard, there are still some smaller, local banks that don’t yet offer them.

When shopping around for a place to open a checking account, ask about their fees. Remember, big banks and credit unions make their money through charging fees, so it’s important to be aware of these costs upfront. Typical fees include overdraft fees, “bounced” (returned) check fees, and monthly maintenance fees.

Savings Accounts

A savings account is exactly what it sounds like: an account where you can save your money! This is an excellent place to stash money that you don’t need immediately, but can have quick access to just in case. Unlike stock market investments, you don’t have to worry about a market downturn in the event that you need the money. While you won’t get rich putting your money into a savings account, it is an excellent place to build an emergency fund. 

I personally recommend CIT Bank Savings Builder, as they offer 0.40% tiered interest rates. Given that the average savings account interest rate today is 0.06%, it’s definitely in my family’s best interest to save with CIT Bank.

This raises the question: why open a savings account in the first place? Why not just keep everything in your checking account until you need it?

Because opening a savings account adds another layer of self-accountability. If the money is kept in your checking account, you might accidentally spend it. Furthermore, by having your money in a separate account, you reduce the temptation of impulse buys that can quickly drain your balance. 

Since checking accounts are not intended for everyday spending, there are typically limits on how much you can withdraw every month. This limit is 6 withdrawals monthly, though you might want to check with your bank and inquire about any fees or penalties if you need to withdraw from your savings more than 6 times per month.

Money Market Accounts

Money market accounts, which are also known as MMAs, combine key features from both checking and savings accounts. When you create an MMA, you can get checks as well as a debit card. However, the six-withdrawal limit also applies to this account. 

The primary benefit of an MMA is that they offer much higher interest rates. In order to qualify for and maintain these rates, a large initial minimum deposit is required. The deposit typically ranges between $2,500 and $25,000. Most banks require you to maintain a high daily balance requirement as well.

Certificates of Deposit (CDs)

A certificate of deposit (CD) is a specific type of savings account that keeps your money locked up with the bank until the maturity date. CDs can be as short as a few months and as long as several years. In exchange for keeping the money invested, you enjoy a higher interest rate. However, the average return is about 1%, which is much lower than the rate of inflation as well as the returns you could make in other investments. In general, the longer the term of the CD, the higher the interest rate will be.

If you need to make an early withdrawal before the maturity date, you can do so. However, this comes with a hefty penalty fee. 

For people who want to keep their money at the bank rather than investing it, a CD might make sense. But if you need to withdraw your funds early or don’t like the idea of your money being “tied up,” then a traditional savings account will likely be the better option.

Individual Retirement Accounts (IRAs)

IRAs provide tax-deductible or tax-deferred ways for individuals to save and invest for retirement. 

It is important to note, however, that you cannot purchase and trade stocks directly through a bank. Most banks have a brokerage arm or a relationship with another business that will allow you to do this. For example, Bank of America allows you to trade online through Merrill Edge, its discount brokerage. Similarly, JP Morgan Chase has Chase You Invest Trade and Ally offers investment opportunities with Ally Invest.

Some brokerages companies that were previously known exclusively for investing, such as Charles Schwabb, are beginning to offer checking and savings accounts services for their investors. The lines between banking and investing are distinct, but they’re beginning to blur.

It’s a complex area with a lot of nuance, so if you have any questions, don’t be afraid to ask the team at your local bank!

Brokerage Accounts 

If you want to invest money in the stock market or mutual funds, but don’t want to do it specifically for retirement, then a brokerage account is for you! You can withdraw your investments at any time, whereas IRAs have age requirements for distributions.

You own the money and investments that are in your brokerage account. Online brokerage accounts allow you to manage your own investments directly. If you are new to investing or would rather have an experienced expert do it for you, then you can opt for a managed brokerage account instead. Robo-investors, which are automated investment systems that circumvent the need for a human investment manager, are also growing in popularity.

What’s the Difference Between a Bank and Credit Union?

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Now that we’re covered the different types of financial accounts available, it’s time to discuss the differences between credit unions and banks. While both institutions generally offer the same financial products and services, the way these institutions are structured vary greatly.

Key differences include:

• Ownership.

  Banks are for-profit organizations and are owned by investors. Credit unions, on the other hand, are not-for-profit and are owned directly by their members. Because of this, it’s much harder to join a credit union, as they only accept members based on your place of employment, membership in local organizations, or whether you have an immediate family member who is already a member
  

• Rates.

  Since credit unions are not-for-profit, they usually offer better perks compared to a normal bank. This translates to lower interest rates on credit cards or loans and higher interest rates on your checking and savings accounts.
  

• Scale.

  Most banks have a national or regional presence, whereas credit unions are typically tied to a geographic area. If you bank with a national bank, for example, you can access their network of ATMs and branches across the country whenever you travel. To compensate for this, credit unions have established cooperative networks so that members can still deposit and access funds on-the-go.
  

• Customer service.

  It’s not that national banks can’t have good customer service. Rather, it’s that credit unions are explicitly community-focused. If you frequent your local credit union, you are more likely to establish a meaningful business relationship. The credit unions are founded to benefit the local community, so their success depends on your own financial success.

A third type of bank that is gaining popularity is online and mobile banks.

While traditional banks do allow you to access your account online and through a mobile app, they still have physical storefronts. You can stop by the nearest branch in-person. A true online and mobile bank, however, no longer needs a physical branch. Since the bank doesn’t need to pay the overhead costs of a brick-and-mortar location, they tend to offer lower fees and higher interest rates.

This is one of the many reasons why I do business with CIT Bank.

By reviewing the different types of accounts and financial institutions available, I hope that you are able to find the solution that is best for you and your family!