How Do Checking Accounts Work?

Posted May 23 2014
by PenFed Team
woman working at laptop

A checking account doesn’t typically offer interest like a savings account and it doesn’t extend you credit like a credit card, but it’s still a key part of your financial situation.

While both checking and savings accounts are good ways to keep track of your money, the advantage of checking is the ease of access. Your savings account is where you put money to save it and grow it for later, and the account typically comes with some limits on the checks you can write or the withdrawals you can make. A checking account is money you can access immediately, to buy groceries or pay bills.

While many of us have checking accounts, we may not realize just how checking works. Although it might sound like boring banking minutia, knowing the nitty-gritty details will help you understand how money comes and goes from your account. That knowledge is crucial to knowing what your current balance is, and how to avoid overdrafts. Plus, we can assure you, it’s not all that complicated.

What happens when you write a check?

When you hand a check to a business, the expectation is that your financial institution is going to exchange it for cash taken out of your account. Before the business can get paid, they have to take the check to their financial institution. Once they’ve handed the check over, some or all of the check’s value may be available in the business’s account, but the check’s journey is not done.

The financial institution submits the check to a clearinghouse; oftentimes the Federal Reserve Bank, which identifies your financial institution and passes the check along to be paid. When your bank or credit union receives the check, they match it to your account and withdraw the specified amount from your account to transfer back to the business’s financial institution. Now that the payment has been made, the check is said to have cleared and the full balance should be available to the business you paid (if it was not already).

This may sound like your check has taken a long trip, but because the checks are scanned and their data is transmitted digitally, everything happens pretty quickly. Usually a check will clear within a day of being cashed or deposited. If you’re writing a check to a business or individual who banks at the same financial institution you do, it will clear even faster.

What about debit cards?

Debit cards function in much the same way, though here the transaction is entirely digital. When you swipe your debit card to make purchase without the use of a personal identification number, your card’s data is sent to a processing network. The processing network contacts the financial institution that issued the card which checks that funds are available and then authorizes the purchase.

Even though the authorization is a quick process, debit transactions still need to be cleared similar to checks, which is why you may see an amount on your account that is being held for a transaction that’s been authorized but hasn’t cleared yet. Though the processing network is quick to authorize, payment isn’t made until the merchant sends in transaction data, which will include your signature. The final payment may take a few days to be made, at which point the amount of transaction is removed from your account and put into the business’s account.

Why does this matter to me?

Whether you’re making payments or depositing checks, it’s important to understand that most types of transactions have a delay in adding or removing money from your account. If you take a look at your account balance but forgot you wrote a check yesterday, you could accidentally overdraw your account. Similarly, if you deposited a check, but the check doesn’t clear for some reason, you could wind up with less money in your account than expected.

Remember to keep a close watch on transactions you make, and be mindful that none of these particular transactions happen immediately.