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How to Choose a Bank Account

Banking, Banking Basics
How to Choose a Bank Account

Choosing a bank account often goes hand-in-hand with choosing a bank. Both decisions can help you accomplish major financial goals and save you major money in fees. Whether you’re looking to park your cash for the long or short term (or both), let us help you pick the account type that fits your goals and the financial institution that has the best one.

Types of bank accounts

Keep in mind that some banks or credit unions offer different versions of the following accounts for teens, college students or seniors. All types are protected up to $250,000 at FDIC-insured banks and NCUA-insured credit unions.

Checking account

Use a checking account for your day-to-day banking, including depositing your paycheck, withdrawing cash and paying bills. Checking accounts typically offer multiple ways of accessing your money — such as debit cards, ATMs and personal checks — and don’t limit your number of monthly transactions.

Remember that most checking accounts don’t earn any interest, and those that do will produce lower returns than if you put that money almost anywhere else.

What to look for: Low fees. Look for an account that charges no monthly maintenance fee, requires no minimum balance, reimburses fees from ATM transactions outside the bank’s network and/or has a lenient overdraft policy.

Watch out for that last one. If you’re not careful, even a small transaction could overdraw your account — and the average overdraft fee runs to $34. Fees vary by bank or credit union. If your bank allows it, sign up for phone or email alerts that let you know when your balance is running low.

» MORE: NerdWallet’s best checking accounts

Savings account

A basic savings account gives you a safe place to store your money, but also lets you access funds quickly — say, in the event of a medical emergency, a sudden job loss, or a trip you’re planning this summer. However, it may limit the number of transactions you can make per month.

In exchange for the relatively easy access they offer, most savings accounts earn very little interest. The national average rate for a savings account is currently 0.06%. But you can find online ones that offer rates upward of 1%.

What to look for: As good a rate as you can get. And this is likely to be at a credit union or online-only institution.

» MORE: NerdWallet’s best savings accounts

Money market account

Like savings accounts, money market accounts typically hold cash you won’t need right away. They offer slightly higher interest rates — 0.08% is the national average — than basic savings accounts, but often have higher minimum balance requirements. In some cases, they come with the ability to write checks. Overall, though, they provide less access to funds.

What to look for: The right mix of flexibility and growth — that is, the amount of money you want to have close at hand and your aversion to risk. But if you’re looking for flexibility, you can find online savings accounts with comparable rates and greater access, and you can grow your money more quickly in an investment account.

» MORE: NerdWallet’s best money market accounts

Certificate of deposit (CD)

A certificate of deposit, or CD, is a timed deposit: You promise to leave your money with the bank for a set term — typically, from a few months to five years — and in return the bank offers its highest interest rate on a savings account. The longer the term, the higher the rate. A three-month CD has a national average rate of 0.08%; a six-month CD, 0.13%; a one-year CD, 0.21%. The national average for a five-year CD is currently 0.79%.

What to look for: The right terms. Make sure you’re comfortable with the agreement, because withdrawing before the end of the term will bring with it a penalty.

Because CDs come in a number of varieties that help you maximize your returns, and because they have stricter rules, ask questions before you commit. You’ll want to ensure your money is in the account that best suits your financial needs.

» MORE: Best CD rates

Next steps

Once you’ve picked a bank and an account type, you can open an account. You can typically do this at a branch location, online or on the phone as long as you have valid ID — a driver’s license, state ID, military ID or passport all count — personal data, such as your address and Social Security number, and money you’ll use to fund the account. Online-only accounts accept funds from a check or linked debit or credit card, while branch offices will take cash, a check or a money order.

If you’re applying for a joint account, the person with whom you’re applying will also need to provide his or her information; if you’re a minor, you’ll need to be accompanied by an adult.

One last thing: You don’t have to have all your accounts under the same roof. You might find a good checking account at a nearby credit union, a solid savings account online and an attractive CD at a bank. Mix and match as you see fit.

This post has been updated. It was originally published on August 21, 2012.

Melissa Lambarena is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @LissaLambarena.

Image via iStock.