A bank account is a contract between you and a bank that lets you store money, make payments, and receive deposits

A bank account is not one thing—it is a category. The bank holds your money in an account registered to your name, and you can move money in and out through checks, transfers, debit cards, or direct deposit. The bank pays you interest on some accounts (usually very small amounts) and charges fees on others. In return, the bank uses your money to make loans to other customers and keeps the difference. The type of account you open determines what you can do with it, what it costs, and how much interest you earn.

Banks are required by federal law to insure deposits up to $250,000 per account holder per bank through the Federal Deposit Insurance Corporation (FDIC). This means if the bank fails, you do not lose your money—the government backs it. Credit unions offer the same protection through the National Credit Union Administration (NCUA), though they are member-owned cooperatives rather than for-profit banks.

Key Takeaways

  • A checking account is designed for frequent transactions and usually comes with a debit card and check-writing ability, with little or no interest paid to you.
  • A savings account is designed to hold money you are not spending soon and typically pays interest, though the rate is usually under 1 percent unless you shop for a high-yield account.
  • A money market account combines features of checking and savings—it pays interest and may include a debit card, but often requires a higher minimum balance.
  • A certificate of deposit (CD) locks your money away for a set time period in exchange for a may provide interest rate, which is higher than savings accounts but means you cannot access the money without a penalty.
  • Federal deposit insurance protects up to $250,000 per account type per bank, so opening multiple account types at the same bank does not increase your protection.

Checking accounts: for money you use regularly

A checking account is built for spending. You get a debit card, checks, and the ability to set up automatic bill payments or transfers. The bank does not pay you interest—or pays so little it rounds to zero—because the bank is lending out your money constantly and keeping the profit. Most checking accounts have no monthly fee if you maintain a minimum balance (often $500 to $1,500) or set up direct deposit. If you fall below the minimum or do not meet the direct deposit requirement, the bank charges a monthly maintenance fee, typically $10 to $15.

Some checking accounts offer overdraft protection, which means if you spend more than you have, the bank covers the difference and charges you a fee (usually $25 to $35 per overdraft). This is not assistance programs—it is a loan with a very high effective interest rate. Overdraft fees are one of the largest sources of bank revenue and one of the easiest ways to lose money to fees.

Savings accounts: for money you want to keep separate

A savings account is designed to hold money you are not spending soon. The bank pays you interest on the balance, though the rate varies widely. A traditional savings account at a large bank might pay 0.01 percent annually, meaning $1,000 earns about 10 cents per year. A high-yield savings account at an online bank might pay 4 to 5 percent, meaning $1,000 earns $40 to $50 per year. The difference matters if you have a large balance or plan to keep the money there for years.

Savings accounts usually have no monthly fee and no minimum balance requirement, though some banks require $25 or $100 to open. The tradeoff is that you cannot use a debit card or write checks—you have to transfer money to your checking account first or withdraw it at an ATM. Federal law also limited savings account withdrawals to six per month, though that rule was suspended in 2020 and has not been reinstated, so most banks now allow unlimited withdrawals.

Money market accounts: hybrid accounts with higher minimums

A money market account combines features of checking and savings. You get a debit card or checkbook, the bank pays you interest, and you can make withdrawals whenever you want. The catch is that money market accounts usually require a higher minimum balance to open and to avoid fees—often $2,500 to $10,000. If your balance falls below the minimum, the bank charges a monthly fee or drops your interest rate to nearly zero.

Money market accounts pay more interest than regular savings accounts but less than high-yield savings accounts at online banks. They make sense if you want the flexibility of a checking account, the interest of a savings account, and you have enough money to meet the minimum balance without stress. If you are living paycheck to paycheck, a money market account is not worth the risk of falling below the minimum and paying fees.

Certificates of deposit: locked-in rates for a set time

A certificate of deposit (CD) is an agreement: you give the bank a lump sum of money, the bank locks it away for a set period (3 months, 6 months, 1 year, 5 years, or longer), and the bank pays you a fixed interest rate. CDs pay more interest than savings accounts because the bank knows exactly how long it can lend your money out. A 1-year CD might pay 4 to 5 percent, while a savings account pays 4 to 5 percent only if you shop for a high-yield account.

The downside is that you cannot touch the money without a penalty. If you withdraw before the CD matures, the bank charges an early withdrawal penalty, usually equal to a few months of interest. A $10,000 CD with a 6-month penalty means you lose $200 to $300 if you need the money early. CDs make sense if you know you will not need the money for a specific time period and you want a may provide rate that will not change.

How account type affects FDIC insurance coverage

The Federal Deposit Insurance Corporation insures each account type separately, up to $250,000 per type per bank. This means if you have a checking account and a savings account at the same bank, you are covered for up to $250,000 in each account—$500,000 total. A money market account is insured separately, and CDs are insured separately. Joint accounts (accounts held by two people) are also insured separately, so a joint checking account is covered for $250,000 in addition to your individual checking account.

If you have more than $250,000 at one bank, you need to split it across account types or move the excess to another bank. FDIC insurance does not cover money you lose to fraud, overdraft fees, or poor investment choices—it only covers the bank failing. If someone steals from your account, that is a separate issue handled by your bank's fraud department and your own dispute rights.

Account features that vary by bank and account type

Beyond the basic structure, banks add features that change how useful an account is. Some checking accounts offer cash-back at the register (you can withdraw cash when you swipe your debit card at a store). Some savings accounts have no minimum balance; others require $25 or $100 to open. Some banks charge a fee if you do not maintain a minimum balance or set up direct deposit; others charge no monthly fee at all.

Online banks typically offer higher interest rates on savings and money market accounts because they have lower overhead costs than brick-and-mortar banks. However, online banks do not have physical branches, so you cannot walk in to deposit cash or speak to someone in person. Credit unions often offer lower fees and higher interest rates than traditional banks, but you have to be a member—membership is usually based on where you work, where you live, or a group you belong to.

Frequently Asked Questions

What is the difference between a bank and a credit union?

A bank is a for-profit business owned by shareholders. A credit union is a nonprofit cooperative owned by its members. Credit unions often charge lower fees and pay higher interest rates because they return profits to members instead of shareholders. Both are insured by the federal government up to $250,000 per account type.

Can I have multiple accounts at the same bank?

Yes. You can have a checking account, a savings account, a money market account, and multiple CDs all at the same bank. Each account type is insured separately up to $250,000, so having multiple accounts increases your total FDIC coverage. However, fees and minimum balances apply to each account individually.

Do I need a savings account if I have a checking account?

Not necessarily. If you do not have money to keep separate or you do not care about earning interest, a checking account alone is enough. However, a savings account lets you earn interest on money you are not spending and keeps that money psychologically separate so you are less likely to spend it on impulse.

What happens if I withdraw money from a CD early?

The bank charges an early withdrawal penalty, usually equal to a few months of interest. The penalty amount is disclosed when you open the CD. If you think you might need the money, do not open a CD—use a savings account instead, even if the interest rate is lower.

Which account type should I open first?

Start with a checking account for daily spending and bills. Add a savings account once you have money left over that you want to keep separate. Open a money market account or CD only if you have a specific goal (like saving for a down payment) and enough money to meet the minimum balance without stress.