At some point in our lives, we have to have a bank account. In some cases, multiple bank accounts may be necessary. Whether you are looking to do daily financial operations or saving for your future, you need to consider different types of accounts and their pros and cons. Here are the four most common types of bank accounts and their pros and cons.
Savings Account
The very first account an individual opens in a bank is the savings account.
To easily understand, it is safe to say that savings start with this account. To set up this type of account, it is best to deposit a lump sum amount or link it to automated savings.
Pros
For parents who wish to teach their kids about savings patterns, the savings account is the perfect option to choose. It is also an excellent option for people who wish to save their emergency funds or the extra cash. A justification for this is that savings accounts charge the lowest fee and high interest rates compared to the fee.
Cons
It looks like a win-win situation, but there are several drawbacks of choosing this account type. As compared to other account types, the interest rate it yields is lower. Moreover, the bank imposes some restrictions on a savings account holder. They cannot benefit from debit card purchases, and some banks restrict the account to the holder to a maximum of six withdrawals in a month.
Checking Account
The critical feature of checking accounts is paper checks. It is an account suitable for depositing checks, paying bills, and making withdrawals. Through checking accounts, many banks offer the option of online bill payments. It helps in streamlining the payments. It is a perfect choice for people who do not keep a considerable balance as the ease check cards bring.
Pros
A checking account allows frequent access and easy withdrawal of money. It also allows an individual to write checks for the payments of goods and services against the balance of this account. Paying bills online is also one of the fantastic features of a checking account. Open this type of account does not require a considerable balance.
Cons
There are not many drawbacks to choosing a checking account. But there is one that impacts the decision of a person to open a checking account. It is the wrong account type for people who want to earn interest on their savings. It pays less or no interest on the money deposited in the account. Therefore, it is a wrong choice for people who aim to earn interest on their savings.
Money Market Account
A money market account is a combination of checking and savings account. Money market accounts are the perfect option for anyone who intends to keep their emergency funds for a more extended period. An account holder enjoys the features of both a checking and a savings account through the money markets account.
Pros
The most attractive feature of a money market account for an account holder is high-interest rates. Compared to the savings account and the checking account, the interest rates paid on the deposited amount are the highest.
Cons
Unlike the checking account, a money market account requires a minimum balance. Some banks have set the minimum requirement to $5000, and in some banks, this can go as high as $10,000. Another drawback of opening this type of account is the limited number of withdrawals. Only three to four withdrawals are allowed per month.
CD (Certificate of Deposit)
The Certificate of Deposit (CD) is the perfect option for people looking for an account with the highest earnings. Anyone willing to open a CD account should deposit only the money they do not plan on spending any time soon. When opening this account, one should set a basic CD ladder, through which an account holder can access a portion of their savings at fixed intervals of time.
Pros
The interest rates paid on this type of account are highest compared to all other types of bank accounts. It makes it a perfect choice for those who want to earn a good amount over their savings by keeping their money in a fixed place.
Cons
A CD account requires a person to commit to locking up their money for a certain period. An individual has to keep their savings locked up for a minimum of six to eighteen months. In case a person wishes to withdraw the money, the bank will impose a penalty. To withdraw the money, individuals are expected to pay the penalty.
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