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More options than ever are available when it comes to banking, and not just in the types of accounts that customers can choose. Apart from brick-and-mortar banking institutions, online banks have popped up to take a piece of the banking pie, and they offer a similarly diverse array of account options. It can be difficult to determine the types of accounts you should choose to meet your financial requirements. Let’s answer this question: What types of accounts do banks offer? You’ll then have a better understanding of how these accounts could benefit you.
Most Americans use a checking account to handle their daily financial transactions and pay their bills. Checking accounts typically come with checks (either paper or digital) that you can use to pay bills or purchase goods from businesses. Most checking accounts also have an attached debit card that you can use to purchase items and withdraw cash. Some accounts may have fees associated with them or require that you maintain a minimum balance. Checking accounts usually earn little to no interest.
Unlike checking accounts, savings accounts typically earn interest each month. Currently, the average savings account in the United States earns interest at a rate of .06%, but that low rate is solely due to the COVID pandemic. Rates should rise back to the 2-3% range once America is out of the woods. Some accounts limit customers to a set number of withdrawals per month, at which point you might face a penalty or fee if you go beyond that, thus making savings accounts a less-than-ideal option for bill paying. Low interest and penalties aside, savings accounts can be extremely useful. You can use your savings account to set aside money to use during an emergency. A savings account is also a great option for accumulating the cash you’ll need to meet an important financial goal, such as purchasing a new car or buying a home.
Money Market Accounts (MMAs)
MMAs are a blend of checking and savings accounts. Most MMAs have checks and debit cards associated with them, so you can use them to execute payments and other financial transactions. However, they earn interest as well, usually at a higher rate than a savings account. Additionally, they often have a similar penalty for exceeding a set number of transactions in a month. Therefore, if you plan to maintain a high cash balance in the bank that you’d occasionally withdraw from to pay bills, you could keep those funds in an MMA to earn higher interest.
Certificate of Deposit (CDs)
Certificates of deposit are another type of savings account. CDs offer higher interest rates than standard savings or MMAs. However, in exchange for higher interest, account holders have to keep their funds within the account for a specific period or face a penalty. These accounts are good for people who want to set aside money for an extended period for a specific purpose, such as making a major tax payment. However, if you need greater flexibility with having access to your money, CDs may not be a good choice.
Many banks now offer Individual Retirement Accounts (IRAs), which serve as savings and investment accounts for people who don’t have some other sort of retirement plan associated with their job. Account holders can save up to $5,500 each year for retirement in their IRAs (or $6,500 annually if you’re 50 or older). You can usually choose between traditional or Roth IRA accounts when you’re selecting your retirement account, depending upon what’s best for your financial situation.
Many banks offer brokerage services as well. If you have a brokerage account at your bank, you can use it to buy and sell securities, such as stocks and mutual funds. While these types of securities can offer significantly higher returns than typical bank accounts, as well as dividends, they don’t have the FDIC guarantees that those accounts have. If you use your brokerage account to purchase a stock or mutual fund, you could potentially lose all your money. Prior to opening and using one of these accounts, talk to a trusted financial advisor.
Choosing the Right Type of Bank and Bank Account
Ask anyone this question: “What types of accounts do banks offer?” The most common response is likely to be, “checking.” Times have changed, and online and traditional banks offer a wide variety of accounts and services. If you’ve only relied upon your bank’s checking and savings account services, you might be missing out. So, go online or visit a nearby branch when you get a chance, and see what additional financial services your current bank might be able to provide for you.