The Student's Guide to Banking - Types of Accounts

Banks and credit unions offer a variety of FDIC or NCUA-insured accounts - checking, savings, money market deposit accounts, and Certificates of Deposit (CDs).

Choosing the types of accounts that work for you should be fairly easy; it mostly depends on how much money you have and how long it will be before you need the money.

Checking Accounts
Your checking account is for very short term money needs. A checking account is designed to hold your cash until you make a purchase with a check or debit card, or pay the monthly bills by check or online bill-pay. Automatic monthly payments and electronic transfers also come from your checking account.

There is no minimum balance on a regular checking account, and these types of checking accounts typically don't pay interest on your account balance.

Some checking accounts do pay interest, but you'll usually have to maintain a healthy minimum balance to earn it.

Free basic checking has become common with many financial institutions, but make sure the one you're considering doesn't charge hidden fees or have certain conditions you have to meet.

Checking accounts generally have no limits on the number of transactions allowed, but often have a daily ATM withdrawal limit of $300-$500. Check with your financial institution to find out their policy.

Checking accounts at a credit union are called "share draft accounts". The name just reflects that credit union account holders are owner/members, not customers.

Student checking typically comes with no maintenance fees, free online bill-pay, free debit card, and may even offer perks such as free electronic transfers from your parent's account or a one-time overdraft forgiveness.

Savings Accounts
A savings account simply provide you with a safe place to store the money that you won't need right away. Your money will be safe from fires, theft, and loss, or anything else that could happen to a wad of cash. And even though you can really access your money anytime you need it by visiting a bank branch or ATM, it's just less tempting to spend if you're not carrying it around with you all the time.

Savings accounts are the perfect place to hold your tuition money until payment is due, build up an emergency fund, save money for spring break or other luxuries, or as a place to "park" your money until you research better investment ideas.

Savings account earn interest. It won't amount to much when you have a small balance - but as you grow your savings balance the interest will begin to accumulate nicely.

Savings accounts typically have a minimum balance requirement, or there will be a service charge for a low balance. Credit union savings accounts tend to have minimums of $5-$25, bank savings minimums are typically about $300, but student savings account usually have a lower minimum balance requirement of $100. These are just general guidelines and vary by institution.

Federal regulations limit the number of Automated Clearing House (ACH) withdrawals or transfers to six per month. This rule applies to transactions conducted over the phone or online and automated payments. It doesn't apply to ATM and in-person transactions.

While it's certainly possible to save extra money in your checking account, it's a better idea to keep your savings separate. It'll be easier to resist the temptation to dip into it if it's kept separately in a savings account - where it gets more respect as being off-limits until you really need it. Plus, as mentioned above, savings accounts earn interest.

Savings accounts at a credit union are called "share accounts" and usually have lower balance requirements than banks, typically $5 to $25 (even for non-students).

Money Market Deposit Accounts
A money market deposit account (MMDA), also called a Money Market Account, works like a savings account and pays interest, but it also gives limited check-writing privileges. This cross between checking and savings may be a good alternative to a regular savings account.

An MMDA is FDIC or NCUA-insured, and is different from a money market fund. Money market funds are actually mutual funds - and though money market funds are generally pretty safe, they are not federally-insured against loss.

An MMDA may have a fairly high minimum balance requirement of $2500-$5000 if you go to your local financial institution, but a number of banks have balance minimums as low as $1-$100 if you do your banking strictly online.

As with any type of account, know and maintain at least the minimum balance requirement to avoid paying monthly account service fees.

MMDAs may pay better interest than a traditional savings account, but not always. The size of your account balance will usually be the determining factor.

You can make up to six withdrawal transactions per month from an MMDA, and up to three of those transactions may be by check. Due to this three check limit, an MMDA may be better suited to pay your larger regular expenses, such as rent or tuition, or to keep emergency funds that you won't tap into until it's needed.

Certificates of Deposit
A Certificate of Deposit (CD) is a low-risk investment of a fixed amount of money for a fixed length of time. CDs usually pay better interest than a traditional savings account or MMDA. The catch with a CD is that you'll have to pay a penalty if you withdraw your money early. Overall, CDs are a great place to put your extra cash that you don't plan on using in the near future.

CDs typically have dollar-amount minimums of several hundred to several thousand dollars, depending on the financial institution.

A CD may not be withdrawn penalty-free until the maturity date. You will choose the term when you buy your CD, which may be 30 days, six months, five years, or anywhere in between - depending on what you need and what the financial institution offers. Read your contract to be sure of the term length.

Longer terms generally pay better interest, but not always. Be careful about longer terms if you don't have an adequate emergency fund stashed somewhere else, or you may have no other choice but to withdraw funds early and pay the penalty fee.

Financial institutions will usually notify you just before your CD matures. You can take your money out at maturity and use the cash for your needs or put back into another CD. If you don't do anything with the funds, the financial institution will usually roll the money into another CD for the same term length, but it may be at the previous interest rate or at the current interest rate.

It's better if you actively take part in what happens to your funds at maturity so you know you're getting the best rate possible - you may find a better rate with another institution by the time your CD matures.



Sources:
Federal Deposit Insurance Corporation
National Credit Union Administration