Understanding Transaction Accounts

Transaction accounts are the backbone of everyday banking, offering convenient access to your money for spending, bill payments, and deposits. Whether you're managing personal finances or handling business expenses, understanding how these accounts work could help you make smart financial decisions. 

Keep reading to learn more about transaction accounts, including their definition, examples of transaction accounts, and how non-transaction accounts differ.

What Is a Transaction Account?

A transaction account is a bank account that gives you quick access to your money. Also known as a checking account, people typically use them to pay their bills and make everyday purchases, such as groceries or gasoline. In other words, these accounts are designed for plenty of transactions. 

Some banks offer incentives, such as low monthly fees and manageable balance requirements, for their transaction accounts. However, not all financial institutions make the same offers across the board. It’s important to talk to one of their representatives to make sure you have all the details before committing to opening an account with them. 

Transaction Account Examples

A common example is a checking account at either a brick-and-mortar bank, an online bank, or a credit union. These accounts typically are replenished through mobile transfers, check deposits, and direct deposits. 

Because they are built for numerous transactions, people put money in and pull it back out through wire transfers, ATM cards, debit cards, and ACH transfers. 

Other examples of transaction accounts include:

• Demand deposit accounts: Demand deposit accounts allow you to access your money without notice. They do not have maturity periods, can earn interest in some cases, and do not limit the number of withdrawals you can make. Checking accounts fall under this category. 

• NOW accounts: A negotiable order of withdrawal (NOW) account is a demand deposit account that generates interest, similar to an interest-bearing checking account. 

• Automatic transfer service accounts: An automatic transfer service account is a banking service that automatically transfers money between a person’s accounts. 

• Credit union share draft accounts: These share draft accounts are used when you’re part owner of a credit union.

Now, if you can open a transaction account, you might be able to procure a non-transaction account.

What Is a Non-Transaction Account?

A non-transaction account is a bank account that is not designed for consistent transactions. If you have one, you will typically find yourself limited in how many transfers you can make per month, or you may experience waiting periods before you’re allowed to withdraw your money.  

Non-Transaction Account Examples

Examples of non-transaction accounts include:

• Savings accounts: A savings account is a deposit account designed to hold money not intended for daily use. It earns interest and has limited withdrawal capabilities per federal guidelines.

• CDs: A CD, or certificate of deposit, is a savings tool where you can earn interest on a specific amount of money for a specific period of time. The catch, however, is that you can’t withdraw that money during the designated time period. If you do, you may face penalty fees. 

• Bonds: A bond is a type of loan you make to either a government entity or a company for a specific period of time. The party you loan the funds to agrees to pay back the entire sum, plus interest, for as long as they use your money. 

• IRAs: An IRA, or individual retirement account, is where you save money for retirement, along with potentially growing your money through investments and oftentimes receiving tax breaks. 

• Money market accounts: Money market accounts are FDIC-insured deposit accounts that typically pay higher interest rates than your average savings account. Some of them may restrict the number of withdrawals each month, so make sure to take that into consideration before opening one. 

• 529 college savings plans: 529 plans are tax-advantaged accounts specifically for education expenses. Earnings grow tax-free if used for qualified education costs.

Recommended: Guide to High-Yield Savings Accounts

Differences Between Transaction and Non-Transaction Accounts

A significant difference between transaction and non-transaction accounts is that transaction accounts allow immediate access to your money without limits or penalties. The speed at which you can access those funds is known as the speed of liquidity. 

Non-transaction accounts, on the other hand, limit the number of transfers and withdrawals you can make each month. They are designed for saving and/or investing, not for everyday spending.

Recommended: How Many Bank Accounts Should I Have?

The Takeaway

Transaction accounts allow you access to your money without limits or punitive fees, while non-transaction accounts do not allow endless transfers and withdrawals. This distinction may be important when deciding what type of account to procure for your financial needs. 

For example, you may need an account to pay bills, buy groceries, fill up your gas tank, and supply money for a night out. In this case, you may need a transaction account.

However, if you’re able to part with some of your money for a longer period of time so it can generate a decent amount of interest, then a non-transaction account might be the way to go.

If you’re looking to open a high-yield savings account, Lantern by SoFi could help. Lantern’s online banking marketplace makes it easy to compare annual percentage yields and choose a bank account that’s right for you.

Compare today’s high-yield savings rates, including fees and balance minimums.