What a bank account does

A bank account is a container for your money that the bank holds and protects for you. When you deposit cash or a check, the bank records how much you put in. When you withdraw money—by writing a check, using an ATM, or swiping a debit card—the bank subtracts that amount from your total. The number you see on your statement is your balance: what the bank currently holds in your name.

The bank does not lock your money away. You can take it out whenever you want during business hours or through an ATM. The bank's job is to keep track of how much is yours, protect it from theft, and let you move it in and out as you need to. In return, the bank charges you fees for certain services or keeps some of the interest it earns on the money you leave sitting there.

Key Takeaways

  • Your balance is the total amount of money the bank currently holds for you, and it changes every time you deposit or withdraw.
  • Deposits add money to your account; withdrawals remove it—and the bank records both instantly or within one to two business days.
  • A debit card lets you spend money directly from your account without writing a check, but the money still comes from your balance.
  • If you withdraw more than you have, you overdraw your account and the bank charges you a fee, usually $25 to $35 per overdraft.
  • Interest is money the bank pays you for letting them hold your money, but the rate is usually very small—often less than one percent per year.

How deposits work

A deposit is money you put into your account. You can deposit cash at a teller window, at an ATM, or sometimes through a mobile app if you have a smartphone. You can also deposit a check by mailing it to the bank, handing it to a teller, or photographing it with your phone and uploading it through the bank's app.

When you deposit cash at a teller, the bank counts it, records the amount in your account, and adds it to your balance right away. When you deposit a check, the bank has to verify that the check is real and that the account it is drawn from has enough money to cover it. This takes one to two business days. Until the bank confirms the check is good, the money is not fully yours—it shows as "pending" on your statement. Once the check clears, it becomes part of your balance and you can spend it.

If you deposit a check and withdraw the money before it clears, and the check later bounces (meaning the other account did not have enough money), the bank will reverse the deposit and charge you a fee. This is why banks make you wait: they are protecting themselves and you from spending money that does not actually exist.

How withdrawals work

A withdrawal is money you take out of your account. The most common ways are using an ATM, writing a check, or swiping a debit card at a store or online. Each one removes money from your balance.

When you use an ATM, the machine checks your balance, dispenses the cash, and deducts the amount from your account instantly. When you write a check, you are telling the bank to pay someone else from your account. The check does not clear immediately—it can take three to five business days for the other person to deposit it and for the bank to process it. Until then, the money is still in your account, but you should not spend it because you have already promised it to someone else.

When you swipe a debit card, the bank deducts the money from your account right away or within one business day. A debit card works like a check, but faster: you are spending money directly from your account instead of asking the bank to pay someone else later.

What happens when you run out of money

If you try to withdraw or spend more money than you have in your account, you overdraw your account. The bank will either decline the transaction (refuse to let you spend the money) or allow it to go through and charge you an overdraft fee.

Most banks charge between $25 and $35 per overdraft. If you overdraw by $5 and the bank charges $35, you now owe the bank $40. If you do not deposit money to cover the overdraft within a few days, the bank may charge you another fee. Some banks charge a fee every day your account stays negative; others charge one fee per overdraft event.

You can avoid overdrafts by checking your balance before you spend, keeping a small cushion of extra money in your account, or asking the bank to decline transactions instead of charging you a fee. Some banks offer overdraft protection, which links your checking account to a savings account or credit line. If you overdraw, the bank automatically transfers money from the linked account to cover it, usually for a smaller fee than a regular overdraft charge.

How interest works

Interest is money the bank pays you for letting them hold your money. Banks lend out the money you deposit to other customers who take out loans. The bank keeps some of the interest those borrowers pay, and gives you a small share.

Interest rates vary widely depending on the bank and the type of account. A regular checking account might earn almost no interest—sometimes 0.01 percent per year or less. A savings account or money market account usually earns more, but the rate changes based on what the Federal Reserve does with interest rates. When the Fed raises rates, banks raise the rates they pay you. When the Fed lowers rates, banks lower what they pay you.

The interest rate is expressed as an annual percentage rate, or APY. If your account earns 0.5 percent APY and you keep $1,000 in it for a full year, the bank will pay you about $5 in interest. The interest is added to your account automatically, usually monthly or quarterly. You do not have to do anything to earn it—it just accumulates as long as your money sits there.

How fees work

Banks charge fees for services and to make money when you do not keep much in your account. The most common fees are monthly maintenance fees (usually $5 to $15 per month), overdraft fees, ATM fees if you use another bank's machine, and fees for stopping payment on a check.

Some banks waive the monthly fee if you keep a minimum balance—often $500 or $1,000—or if you set up direct deposit of your paycheck. Some banks charge no monthly fee at all. When you open an account, ask what fees apply and under what conditions they are waived. Read the fee schedule the bank gives you; it lists every charge and when it applies.

Fees add up quickly if you are not paying attention. An overdraft fee, a monthly maintenance fee, and an ATM fee in the same month can cost $50 or more. Choosing a bank with low fees or no fees saves you money over time, especially if you are living paycheck to paycheck.

How statements work

A statement is a record of every deposit, withdrawal, fee, and interest payment on your account over a set period—usually one month. The bank sends you a statement by mail or email, or you can view it online through your bank's website or app.

Your statement shows your opening balance (what you had at the start of the month), every transaction in order, any fees charged, any interest earned, and your closing balance (what you have at the end of the month). It also shows which checks have cleared and which are still pending.

You should review your statement every month to make sure all the transactions are ones you made, that no unauthorized charges appear, and that the math is correct. If you see a transaction you did not make, contact the bank right away. Banks have rules about how long you have to report fraud, and waiting too long can mean you lose the money.

Frequently Asked Questions

Why does it take so long for checks to clear?

Banks need time to verify that the check is real, that the account it is drawn from exists, and that there is enough money to cover it. This used to take five to seven days, but federal rules now require most checks to clear within two business days. Some banks clear checks faster if you deposit them early in the day.

Can I have more than one bank account?

Yes. Many people have a checking account at one bank and a savings account at another, or accounts at multiple banks. Each account is separate and has its own balance, fees, and interest rate. You can move money between your own accounts, but transfers between different banks usually take one to three business days.

What is the difference between a checking account and a savings account?

A checking account is designed for frequent deposits and withdrawals—you can write unlimited checks and use a debit card. A savings account is designed to hold money and earn interest; it usually limits how many times per month you can withdraw. Savings accounts earn higher interest rates because the bank knows the money will sit there longer.

What happens to my money if the bank fails?

The Federal Deposit Insurance Corporation, or FDIC, insures deposits at most banks. If a bank fails, the FDIC pays you back up to $250,000 per account. This means your money is protected even if the bank goes out of business. Credit unions are insured by a similar agency called the NCUA.

Can I spend money that is still pending?

Technically yes, but you should not. If a deposit is pending and you spend the money before it clears, and the deposit later bounces, your account will go negative and you will owe the bank an overdraft fee. It is safer to wait until deposits show as cleared before you spend them.