Checking, Savings, and CD: Which One Is Right For You?

Not sure whether a checking account, savings account, or CD is right for you? Let's take a look at each type of account below and decide which option is best for you.

Checking Account

A checking account -- also called a transactional account -- is a type of account that allows you to:

• Have access to your funds
• Pay your bills
• Use your debit card
• Set up automatic transfers
• Write a check
• Make financial transactions (debits)
• Deposit funds into your account (credits)

Almost all banks offer a checking account, so you need to carefully consider key features (fees and APY) including:

• Whether your checking account has a minimum balance requirement and if you can maintain it in order to avoid any costly fees.
• Look for any monthly fees in place. In general, credit unions offer lower fees than banks.
• Check to see if there are any limits on debit and credit transactions. Checking accounts generally allow as many transactions as you need.
• Look for overdraft protection. Many banks, credit unions, and online accounts like Dave allow you to link another account to cover any overdrafts so you can avoid any hefty fees.

You can open a checking account at a local bank, credit union, or online financial institution. When you sign up, you will need to provide your Social Security number and a valid ID. The bank will also run a credit check to ensure they won't lose any money by letting you open a bank account; and if you are under 18, you will need a cosigner to open the account.

Once your account is open, make sure you take the following steps:

•  Track the available funds in your account to avoid overdrafts since the most recent online or ATM statements may still be pending and not accurately reflect your real balance. (According to the Consumer Financial Protection Bureau, the average overdraft fee is around $34.) In addition to possible overdrafts, tracking your account activity lets you spot any incorrect transactions.
• It's best to keep only the amount needed for your daily and monthly expenses in your account. While checking accounts are insured by the FDIC for up to $250,000, it's a better investment to put that money in a higher-interest savings account. (More on that in a little.)
• If you have a lost or stolen card or checkbook, report it immediately so your bank can stop any payments made with these.

Checking Account Pros:

• Can improve banking history
• Alternative to prepaid debit cards or check-cashing services

Checking Account Cons:

• May come with monthly fees that can't be waived
• Overdraft fees can run high

If you have bad credit, a history of overdrafts, and/or financial instability, you may either not qualify for a checking account, have your current checking account terminated, and/or prevent you from opening a new one at another bank.

If you were reported as a risky consumer, you could also wind up with a ChexSystems record, which reports your checking account history from the previous five years and may include:

• Your name
• Your Social Security number
• Your past addresses
• Overdrafts
• Unpaid fees and balances
• Fraudulent or suspected fraudulent activities
• Accounts closed involuntarily
• Bank account inquiries or applications
• Public records

A ChexSystems record (along with other records such as TeleCheck and Electronic Warning System) makes it difficult for you to be approved for a checking account since financial institutions review your reports before deciding on approval.

(Note: Any incorrect information in your ChexSystems or EWS report can be challenged. Both banks and ChexSystems must conduct investigations and make corrections to any inaccuracies.)

In the case you can't qualify for a checking account, you can look into a second chance account (also called "fresh start checking" or "opportunity checking"), which is available for borrowers with bad credit. These accounts are available in all 50 states and you can find them at your local bank, credit union, or online (with a service like Chime). While they can be helpful, they generally come with higher fees, a minimum deposit requirement, and no overdraft protection. However, the main benefit is that once you prove you can handle your finances responsibly, you can qualify for traditional banking. 

Don't know where to start? Here are our top picks for the best high-yield accounts and accounts for students and seniors. You can also look to one of our top checking account providers.

Savings Account

A savings account allows you to store your cash securely and earn a small amount of interest on your money. These accounts are federally insured, meaning up to $250,000 of the funds in your account would be protected if the bank failed. Additionally, many of them have low initial deposit requirements and usually don’t charge monthly maintenance fees.

Savings accounts are specifically designed for individuals who don't need their funds immediately since it isn't as easy to access as the funds in your checking account; it is also an excellent way to build an emergency fund or nest egg. In general, it's a good idea to keep a minimum of six months' worth of living expenses (rent, utilities, grocery bills, etc); at the very least, keep around $500 to help you out for any small financial issues.

Savings accounts with a high APY (or annual percentage yield) can help you grow your money and are usually found through online banks. The fact is, the majority of savings accounts only generate a small amount of interest (around 0.06%) while very few offer rates up to 2%.

Something to keep in mind: you generally can't make payments from a savings account, nor can you make more than six withdrawals or transfers each month (according to a federal law called Regulation D). Additional transfers and withdrawals usually result in a fee. (Note: withdrawing your funds from an ATM or through your teller doesn't count towards the six withdrawals.)

If you're looking for low fees and good rates, the best place to look is a local credit union or online institution. Once you've found the right bank -- whether online or at a local branch -- you can open your account. You will need to provide your personal information (such as your Social Security number, phone number, and address) and a government-issued photo ID.

CD (Certificate of Deposit)

A CD -- or Certificate of Deposit -- is a specific type of savings account that holds a lump sum for a fixed period of time (6 months, one year, or five years) while the bank pays interest until the maturity date. After the specified period of time is over, you can receive the untouched funds you initially invested in your CD, along with any added interest. CDs generally don't have any monthly fees.

A CD is considered to be one of the safest methods of long-term saving. In general, interest rates are much higher than your traditional savings account, although each bank or credit union sets their own term length, required amount, early withdrawal penalties, and APY. The longer your term, the higher the interest rate. Ideally, you want to find a CD with an interest rate higher than 1%; otherwise, you should just settle for a high-yield savings account.

You can find a CD at nearly all financial institutions such as local and online banks, credit unions, and brokerage accounts (the latter of which serve as the go-between for you and the bank). It's important to shop around for your best options, whether online or locally.

A few key things to remember:

• If you access your CD funds before the term is over, you'll be subject to an early penalty withdrawal, which is generally the interest accrued over a specific number of months. However, some financial institutions may offer an option for early withdrawal in the case of an emergency.
• CDs are insured by the FDIC for up to $250,000 for individual accounts and $500,000 for joint accounts. While the chances of a bank failure are low, you may still worry about your funds if you have more than that amount. In this case, consider putting those funds in a different name (like a family member's) or in another financial institution.
• Interest rates remain the same over the term so you don't have to worry about any fluctuations that may result in lower earnings.
• Your bank or credit union will send you monthly or quarterly statements and compound the CD's interest once it is funded.
• The term length you choose is important. For example, if you are just looking to save cash for the future, you may want to pick a longer term to receive higher interest; you may choose to open and fund your CD when you anticipate that the Fed will raise rates.   Additionally, banks and credit unions may offer an odd-term promotional CD with excellent rates. These odd-term CDs can be offered during a special event or occasion and often offer better rates.
• The interest earned on your CD (whether monthly or quarterly) is reported to you and needs to be reported as income when you file your tax return. (Remember, you can't withdraw any earnings until your CD maturity date.)
• Once your CD is nearing the maturity date, you will be notified by your bank or credit union and given directions on what you can do with the funds, which is usually one of the following:   * Roll over the CD into a new one at your current bank, usually into one with a similar term.     * Move the funds into a savings, checking, or money market account at that bank.   * Withdraw the funds and either have them mailed to you with a check or transfer them to an external bank account.   Be sure not the miss the deadline for your CD's maturity date or else you may end up being locked into less-than-ideal rates.
• Direct vs. Brokered CDs: CDs offered through a brokerage account are technically bank CDs in which the brokerage firm is serving as a middleman.   Brokerage firms and individual salespeople, also known as deposit brokers, may offer what is called a brokered CD to consumers, which is a lower rate for a CD in exchange for bringing deposits to the financial institution. (Note: Check the deposit broker's background since they are not licensed, certified, or approved by a state or federal agency. You can check your broker's history through online databases through your state securities regulator, state consumer protection office, the SEC, and FINRA.   While brokered CDs offer lower rates, they do have advantages such as:     * They will be included in the same monthly or quarterly statements on your brokerage account, along with the terms and maturity dates, making tracking your CD and its maturity date much easier.     * If you already have an account with your brokerage firm, it will be much easier to open (and close) a CD.   However, if you need to withdraw your funds early, you will need to sell it on a secondary market, which means there are no guarantees on the price you will get for your CD.

Pros

• CDs are great for consumers looking to save up for an emergency fund or large purchase in the future (such as a down payment for a car or home) and don't need the extra cash now.
• CDs allow you to receive a higher rate than what you would receive with a savings account.
• Since the interest rate remains the same through your term, you don't have to worry about any losses.
• CDs are federally insured if you open one with an FDIC bank or NCUA credit union.

Cons

• Your funds can't be withdrawn until the CD maturity date without incurring an early withdrawal penalty.

How are CD rates set?

Every 6 to 8 weeks, the Federal Reserve Board's Federal Open Market Committee decides whether or not they will raise, lower, or keep the current federal funds rate. The rate reflects what banks pay in order to borrow money through the Federal Reserve Board. When the federal funds rate is high, banks have the incentive to pay their customers a competitive interest rate in exchange for opening a CD.

Types of CDs

• Bump-up CDs:  Bump-up CDs, also called "raise-your-rate certificates," allow consumers to receive a higher rate once during their term (or twice, if the term length is longer). For example, if you open a CD with a 5-year term, you can lock in a higher rate in the case that interest rates rise during the term. However, these generally have lower interest rates than fixed-rate CDs and usually require a higher minimum deposit.
• Add-on CDs: Add-on CDs allow you to make additional deposits to your principal amount. Some financial institutions allow you to add-on as much as you want, while others limit the number of add-ons by time period or term.
• No-penalty CDs: These CDs have a lower risk in the case you need to withdraw your cash early. However, no-penalty CDs usually come with a much lower interest rate.
• Jumbo CDs: These CDs live up to their name since they require a large minimum deposit. This amount depends on the financial institution but may range from $25,000 to $100,000.
• IRA CDs: Many financial institutions offer IRA CDs, which is a useful tool for retirement. This CD must be held in a tax-advantaged individual retirement account.
• Step-up CD: A step-up CD allows rates to automatically increase at regular intervals.
• Callable CDs: A callable CD allows your issuing bank or credit union to recall the CD at any time and return your funds to you. Because of this unpredictability, banks usually offer a higher interest rate. (You can also opt out of this by searching for a "non-callable CD.")
• Zero-coupon CDs: Zero-coupon CDs are a type of CD bought at a discounted rate. Interest payments are paid at the maturity date instead of being disbursed on a scheduled basis. Even though you won't know your CD's full amount until the maturity date, you will still be taxed on earned interest annually.
• CD Ladder: A CD ladder allows you to access higher rates offered through a 5-year term, except that you can receive a portion of your funds each year. You will initially take one-fifth of the total amount you want to invest and put each amount in five CDs: a 1-year, 2-year, 3-year, 4-year, and 5-year CD. After one year, you take the funds and invest in a high-rate 5-year CD. The next year, you will take the 2-year CD and invest in another 5-year CD, and so forth until you end up with all five CDs in top-rate 5-year CDs. This keeps your funds more accessible and penalty-free, with each CD maturing once a year. (Note: There are also shorter versions of the CD ladder with 6 month to 3 year CDs.)

What is the purpose of a checking account, savings account, and CD?

A checking account (also called a transactional account) is a specific type of bank account that lets you easily access your funds. This account is generally used for any transactions and to pay your bills.

A savings account allows you to store your cash securely in a federally insured account (up to $250,000) and generally has a low interest rate.

A CD (Certificate of Deposit), which is offered by nearly all financial institutions, allows you to receive a high interest rate as long as you leave a lump-sum deposit in the account for a specific period of time.