Banks offer various types of consumer and commercial accounts. Each type has a specific purpose. Both the account holder and the bank want the monies held on deposit to earn interest or provide investment power. The bank profits from investing a sizeable portion of its assets, and account holders can choose to place some or all of their money into an investment earning program.
Simple Checking Account
A basic checking account allows for the writing of checks or the use of a debit card to make purchases. Most of these simple accounts do not earn interest for the consumer. However, these accounts generally do not require a large minimum balance be kept. The bank may or may not charge a monthly fee. Some accounts of this type prohibit the consumer from making more than a specified number of transactions per month, and there may also be a set limit to the amount that can be purchased each day with a debit card.
Interest-Accruing Checking Accounts
Most banks require the account holder to maintain a substantial minimum balance at all times in order for interest to accrue on this type of account. There are usually no maximum number of transactions allowed per month, but the interest earning rate will vary depending on the average monthly balance. The bank will also charge a monthly fee if the balance drops below a certain amount. These accounts come with several added convenience features such as automatic overdraft protection and a linked savings account. Both simple and interest-accruing checking accounts allow the consumer to perform most banking transactions online.
A savings account earns interest at a nominal rate. The account holder is allowed to make withdrawals, but a fee may apply, especially if more than two or three withdrawals are made during a calendar month or earnings cycle. Most banks issue a monthly or quarterly statement for this type of account. A savings account is an incentive for the consumer or business to save money because the interest rate is generally higher than what is offered with most checking accounts.
Money Market Accounts
Banks use the money deposited in this type of account as an investment in short-term debts such as treasury bills. Only a limited number of withdrawals - including the writing of checks - is allowed with this type of bank account. The interest earned is slightly higher than what is offered with most checking or savings accounts. Most banks require a high beginning balance, sometimes thousands of dollars.
Certificates Of Deposit
Abbreviated as CDs, these accounts are known as time deposits because the money must be held on account for a substantial period of time. The minimum period for which the money must remain in the bank varies from several months to six years. No withdrawals are allowed, but the account can be closed prematurely. A large early withdrawal fee will be charged if the account holder chooses this option. The earnings interest rate is quite favorable, and this rate usually increases several times until the maturity date is reached.