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Most of us wouldn't feel very safe keeping all of our hard-earned cash under our pillows at night, so we open bank accounts and park our cash there instead. But picking the right bank or credit union account can be challenging, especially for those who are new to banking.
This guide can help you understand banks, types of bank accounts, how to compare banks, and how to pick the right one for you.
A bank is an institution where anyone (approved by the bank) can deposit savings and take out loans. Banks are often seen as a convenient and secure way to store money, and some account types also earn interest. Most banks have both online and in-person services.
Banks are for-profit organizations. At a bank, you can open checking and savings accounts, loans, credit cards, or other products. Almost anyone can join a bank.
Banks are in the business of making loans. Banks lend money to creditworthy borrowers, and then those loan customers pay back what they borrow plus interest. Charging interest and other fees is how banks earn profits for shareholders. Banks also pass some of this profit back to those with deposit accounts as a way to incentivize them to keep money there.
In order to operate, a bank must have a charter, which is essentially a license to operate. U.S. banks can be chartered on the national level or the state level. Nationally chartered banks are overseen by the U.S. Department of the Comptroller of Currency. This organization makes sure the banks operate within the laws. It also requires nationally chartered banks to maintain FDIC insurance. This protects your money up to $250,000 per person per bank in the event of bank failure.
State-chartered banks operate under the regulations of the state they have their charter through, and they're overseen by a state institution. These banks are typically smaller than nationally chartered banks and operate in a limited area.
There are many ways to break banks into types. We'll look at two of the most common methods below.
One way to categorize banks is to look at the services they offer to their customers. Here are some common types you might come across:
Another way to compare banks is by looking at their service area. These are the main categories you'll find here:
Credit unions are similar to banks in many ways. Both offer a variety of bank accounts for their customers to choose from and lend money to qualifying borrowers. But unlike banks, credit unions are nonprofit institutions. That means any money a credit union earns goes back to its members. As a result, credit unions can often offer more competitive rates and lower fees than some large national banks.
But credit unions have their drawbacks as well. Most only operate in a small area and they have membership requirements that restrict who can join. Their online and mobile banking tools often aren't as good as those you'll find with large banks, either. But they could still be a good fit for those who value customer service and don't travel often.
There are four main types of bank accounts: checking accounts, savings accounts, CDs, and MMAs. We'll go over each one at a time below.
Best for: People who want a safe place to keep the money they use to pay bills.
Not for: People who want to earn a lot of interest on their money.
You should open a checking account for money you plan to use for everyday spending. You can withdraw money as often as you like, as long as you don't withdraw more money than you have. (There are restrictions on withdraws from savings accounts, CDs, and money market accounts.)
Best for: Those who want a low-risk way to grow their money.
Not for: Those who plan to withdraw money frequently from their account.
A savings account is a low-risk account where you can earn interest on your money. It's a great place to save for an emergency fund, a vacation, or a down payment on a home. However, you can only withdraw money from a savings account account a handful of times every month -- so it's not great for paying bills. Checking accounts are better for bills.
Best for: Those who want to earn a high interest rate without sacrificing easy access to their money.
Not for: Those with a small amount of savings who cannot meet the minimum balance requirements.
If checking and savings accounts had a baby, that baby would be a money market account (MMA). MMAs often come with checks or debit cards, like a checking account. They also have high interest rates -- like savings accounts. However, they usually have high minimum balances. You'll have to be able to keep a hefty chunk of cash in the bank at all times if you want to have an MMA.
Best for: Those who want to earn a higher interest rate on their savings and don't need to spend that money anytime soon.
Not for: Those who think they'll need to withdraw their money before the CD's maturity date.
A certificate of deposit (CD), also known as a share certificate if you're using a credit union, is a special type of savings account that offers a higher interest rate -- but there's a catch. When you put the money into a CD, you're agreeing that you won't touch it for the length of the CD term. This can be anywhere from a few months to several years. Usually, the longer the loan term, the higher the interest rate. The best CDs can offer APYs of around 5%.
Once you've narrowed your list down to a couple banks, take a look at their accounts and ask the following questions.
Make sure you're getting the best account for you by comparing savings rates and promotions. Here are some of our favorite high-yield savings accounts to consider.
Account | APY | Promotion | Next Steps |
---|---|---|---|
Open Account for American Express® High Yield Savings
On American Express's Secure Website.
Rating image, 4.00 out of 5 stars.
4.00/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best = Excellent = Good = Fair = Poor |
3.90%
Rate info
3.90% annual percentage yield as of December 10, 2024. Terms apply.
Min. to earn: $0
|
N/A
|
Open Account for American Express® High Yield Savings
On American Express's Secure Website. |
Open Account for SoFi Checking and Savings
On SoFi's Secure Website.
Rating image, 4.50 out of 5 stars.
4.50/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best = Excellent = Good = Fair = Poor |
up to 4.00%²
Rate info
You can earn the maximum APY by having Direct Deposit (no minimum amount required) or by making $5,000 or more in Qualifying Deposits every 30 days. See SoFi Checking and Savings rate sheet at: https://www.sofi.com/legal/banking-rate-sheet.
Min. to earn: $0
|
New customers can earn up to a $300 bonus with qualifying direct deposits!¹
|
Open Account for SoFi Checking and Savings
On SoFi's Secure Website. |
Open Account for Capital One 360 Performance Savings
On Capital One's Secure Website.
Rating image, 4.50 out of 5 stars.
4.50/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best = Excellent = Good = Fair = Poor |
3.80%
Rate info
See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening.
Min. to earn: $0
|
N/A
|
Open Account for Capital One 360 Performance Savings
On Capital One's Secure Website. |
Bank pros:
Bank cons:
When you're choosing a bank, start by deciding whether you want to open an account at a bank or a credit union. Then, think about the following features.
This keeps your money safe if the bank or credit union fails. FDIC insurance is a guarantee that the bank will have some or all of your money available for you to withdraw (within account requirements and limitations) -- even if the bank itself fails.
You'll probably never need FDIC or NCUA insurance, but if you do, you'll really need it. Make sure that your bank or credit union is FDIC insured before you sign up. Most state their member ID number on the footer of their website. You can also contact the bank or credit union if you're unsure, but most should have the applicable type of insurance.
To find the right financial institution for you, check where and how you can access your account. If you prefer banking in person, check whether the bank you're interested in has branches near you (or nationwide, if that fits your lifestyle).
Most banks offer some online functionality these days, and some banks are fully online. But it's worth checking out a bank's mobile banking app (if it has one) to see how much of your banking you can do from your phone or other device. This could be especially helpful if you're opening a joint account with someone who doesn't live near you.
Look into how you can contact the bank or credit union if you have questions or problems with your account. Check into its customer service hours as well. Some national banks have 24/7 customer support, while smaller regional banks and credit unions may only operate during normal business hours.
You may only be looking for a checking or savings account now, but in the future you might need to buy a home or start a business and then you'll need a mortgage or a business loan. Anticipating your future needs and choosing a bank or credit union that can accommodate them can prevent you from having to jump ship as your financial needs change.
Don't get caught paying nuisance checking account fees. Check out Motley Fool Money's top checking account picks to open a fee-free checking account that earns a high interest rate.
Yes, a bank is a for-profit business that makes money by charging interest and fees to loan customers. It keeps some of this for its shareholders and returns some to those with deposit accounts at the bank.
Banks use their capital levels to create loans (and, in essence, money since loans create money in the form of deposits). As long as a bank has adequate capital levels, and creditworthy borrowers want loans, a bank will give loans to as many borrowers as possible.
There are many ways to categorize banks. You can break them down by size into national, regional, and community banks. Or look at the services they offer. Retail banks serve individual customers, while commercial banks serve businesses. Many serve both types of customers. And then there are online banks that have no branches, and as a result, can afford to charge fewer fees and offer better interest rates than traditional banks can.
Banks, both large and small, are usually for-profit organizations that offer a wide range of products and services. Credit unions, on the other hand, are not-for-profit institutions that are owned by their members and offer a more personal touch. Online banks have emerged in recent years as an alternative to traditional brick-and-mortar banks and provide the convenience of banking from anywhere, anytime.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Motley Fool Money does not cover all offers on the market. Motley Fool Money is 100% owned and operated by The Motley Fool. Our knowledgeable team of personal finance editors and analysts are employed by The Motley Fool and held to the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.