What Is a Demand Deposit Account?

Demand deposit accounts (DDAs) are bank accounts that allow customers to withdraw their funds at any time. Common demand deposit accounts include checking, savings, and money market savings accounts. As a central part of most people’s finances, it’s important to understand how demand deposit accounts work. Read on to learn more about demand deposit accounts, types of demand deposit accounts, and how to use them.

Examples of demand deposit accounts

How does a demand deposit account work?

Demand deposit accounts—commonly known as checking, savings, and money market accounts—are the backbone of everyday financial transactions. Demand deposit accounts offer high liquidity, meaning you can easily access your funds through checks, debit cards, ATMs, bank tellers, and online transfers.

One of the best features is their no-hassle approach to deposits and withdrawals. Whether you want to visit a bank branch, use an ATM, or log into online banking through your computer or smartphone, your money is always within arm's reach.

Interest rates on demand deposit accounts are typically lower than on other accounts—certificates of deposit (CDs), for example—because these accounts prioritize quick access to cash over growing your wealth. Fees vary widely depending on the bank and account you choose.

Overdraft protection may be available, but it’s best to avoid spending more than you have in your account. While overdraft protection can save you from the embarrassment of a declined transaction, fees can accumulate quickly. Make sure to stay updated on your balance to ensure you’re using it responsibly.

Demand deposit accounts: pros and cons

Advantages of demand deposit accounts

High liquidity

Demand deposit accounts are highly liquid, meaning you can withdraw your funds with ease at any time. This differs from a CD, for example—in which, if you withdraw funds before the maturity date, you’ll pay a penalty.

Convenient methods to manage accounts

Virtually all banks allow you to manage your money through online and mobile banking. With a few clicks on your computer or taps on your mobile device, you can view balances, transfer funds, and handle other self-service needs. Where available, you can withdraw cash using an ATM, and many banks offer branches with robust in-person customer service.

Monthly transaction limits

Checking accounts generally have no transaction limits. You can deposit and withdraw as many times as you want per month without fees or limits. Savings accounts and money market accounts typically limit you to six monthly withdrawals of any amount.

Direct deposit and bill payment features

Many banks offer easy-to-use bill payment systems. You can send an electronic payment or paper check without any added fees. Using your account’s routing and account numbers, you can set up direct deposit from an employer or automatic recurring payment to some billers, such as utility companies. Government agencies, including the Social Security Administration and IRS, also support direct deposit and electronic payments.

FDIC or NCUA protection

Demand deposit accounts in the United States are protected by government-backed insurance. Bank accounts are protected by the Federal Deposit Insurance Corporation (FDIC), while credit union accounts are protected by the National Credit Union Administration (NCUA). Account insurance limits are $250,00 per depositor per financial institution. Even if your bank goes out of business, you’re guaranteed to get your money back up to insurance limits.

Disadvantages of demand deposit accounts

Low interest rates

Checking accounts usually don’t pay any interest or pay very little. Savings accounts pay a little more but still are not all that impressive. Consider a high-yield checking account or high-yield savings account to maximize your interest earnings.

Minimum balance requirements

Some accounts require you to maintain a minimum balance to avoid monthly fees. For example, some banks require a specific minimum daily balance or average daily balance, and sometimes other requirements, to avoid service fees.

Potential for fees

In addition to monthly fees for falling below a minimum balance, you may encounter fees for less common activities, such as overdrafts, using an out-of-network ATM, wire transfers, cashier’s checks, and foreign transactions. Some banks charge for mailing paper statements, but electronic statements are typically free.

Easy to overdraw

If you don’t keep track of your balance, it’s easy to accidentally spend more than your account balance. In the event of non-sufficient funds, some banks decline transactions and don’t charge fees. Others allow the transaction to go through, but the fee per overdraft transaction can be quite high.

Types of demand deposit accounts

Checking

Checking accounts are the most liquid type, with no monthly transaction limits for most consumers. Accounts generally feature ATM access and are ideal for direct deposits from work and bill payments. Some people like to use a debit card to make purchases directly from their checking account balance and avoid running up credit card debt.

Savings

Savings accounts are also highly liquid, but many limit you to six monthly transactions. This is an artifact of a now-defunct rule called Regulation D that previously mandated this limitation. You can withdraw as much as you want at a time and deposit funds at any time with no limits. Because they’re intended for longer-term savings, banks often pay higher interest rates for savings accounts than checking accounts.

Money market account (MMA)

Money market accounts, also known as money market savings accounts, combine the features of a checking and savings account. You’ll generally earn elevated interest rates and face a limit of six monthly withdrawals. But the accounts also generally come with a checkbook and ATM access. Some banks have higher monthly balance requirements to avoid fees than checking and savings accounts.

Demand deposit account vs. time deposit account

Demand deposit accounts are quite different from time deposit accounts. The most common form of time deposit account you’ll likely come across is a CD. With a CD, your deposit is locked away until a specific date.

In exchange for agreeing to keep your cash in an account for a period of time, the bank may offer a higher interest rate than they would with demand deposit accounts. However, if you want to withdraw before the maturity date, you’ll generally have to pay a penalty.

Demand deposit accounts vs. NOW accounts

A negotiable order of withdrawal (NOW) account is much like a checking account, but you must give the bank or credit union notice before withdrawing. Waiting periods are up to seven days, though many account issuers allow you to withdraw sooner. Because the bank can count on funds sitting in the account, NOW accounts generally earn more interest.

Due to the withdrawal limitations, many households would be better off with a money market account than a NOW account if they want to earn interest on an account with check-writing capabilities.

How to open a demand deposit account

Opening a demand deposit account is a quick and easy process. If you want to open a checking or savings account at an online bank, you can often complete the process in as little as five to 10 minutes. Follow these steps to open a demand deposit account:

1. Choose the best bank and account for your needs

The hardest part of opening a new account is picking a bank and account offering that is best for your unique needs. Many banking customers can handle all banking through online and mobile banking and would be best off with an online-only account. A traditional brick-and-mortar bank could make the most sense if you get paid in cash or prefer in-person customer service.

2. Complete the account application

With an online account, you can enter your information and open the account in a few minutes. Plan on supplying your contact information, Social Security number, and other personal details. Many accounts are approved instantly.

If you want to open an account in person, head to a branch with your ID to complete an application. Opening a new account at a branch takes longer, but you’ll generally be able to complete the process and have your account number and login information in a single visit.

3. Fund your account

Once the account is open, it’s time to fund it. You can connect to an existing account at another bank to transfer funds, deposit a check, or take cash to a branch if you use a traditional bank.

TIME Stamp: Demand deposit accounts are the backbone of your finances

Demand deposit accounts are the core of day-to-day financial life. Money enters and exits your financial setup, usually through a checking account, and can be safely stored long-term in a savings account. Having one saves you from needing check-cashing services and other subprime finance tools. Once you have the right combination of demand deposit accounts, you can work on growing your wealth through investments and other accounts. But before worrying about those, ensure you have demand deposit accounts that suit your needs.

Frequently asked questions (FAQs)

Is a DDA an asset or a liability?

For consumers, a demand deposit account (DDA) is an asset. Demand deposit accounts are cash accounts, not credit or loan accounts, which are considered liabilities.

Difference between ‘deposit’ and ‘demand deposit’

A deposit is the action of putting funds into an account. A demand deposit is a type of account, such as checking or savings. You can deposit into a demand deposit account.

Is a demand deposit like a check?

A demand deposit account often comes with a checkbook, so that you can withdraw or pay directly from the account using a paper check. If you want paper checks, be sure to ask if they’re available before opening an account—an increasing number of “checking” accounts, especially from online banks, no longer provide paper checks.