What Is An Interest Bearing Checking Account?

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Contributor, Benzinga
July 31, 2023

Do you want the earning power of a savings account with the simplicity of a checking account? An interest-bearing checking account might be the solution. An interest-bearing checking account, as the name implies, offers more competitive interest rates than traditional checking accounts. Some even offer interest comparable to high-yield savings accounts. While some might offer interest rates of only 1%, it’s better than nothing! Read on to understand what is an interest-bearing checking account and whether it’s right for you.  

How Do Interest-Bearing Checking Accounts Work?

If you’re wondering whether an interest-bearing checking account makes sense for you, consider the following:

Monetary Deposits

Depositing money into an interest earning checking account is the same as deposits to a regular checking account or savings account. You can set up automatic deposits with your employer or transfer funds between accounts. You also have the option to cash checks and deposit the funds in your account.  

Interest-bearing checking accounts might have minimum balance requirements, so ensure you can make an initial transfer when you open the account.

Balance Requirements

Minimum balance requirements vary by bank. Some require $100 to earn interest, while others require $1,000 or more. Understand minimum balance requirements to avoid fees and secure your interest earnings.  

Interest Rates

What is an interest checking account meaning? High interest rate checking accounts have an annual percentage yield (APY) of 4% to 5%. That's comparable to high-yield savings accounts. However, banks may offer you an APY or an APR, which can confuse calculating actual interest. 

APR stands for Annual Percentage Rate and is a nominal rate that refers to a monthly compounding period in most cases. A compounding method needs to be associated with it to get a true effective interest rate. If you see an APR, that usually won't be the annual interest rate. 

APY stands for Annual Percentage Yield and refers to the true interest being earned. It states exactly how much money you will earn as interest on the account. Ask your bank for the APY to ensure you know the interest you'll be earning.

While interest calculations depend on the bank, checking account interest is generally calculated daily and credited at the end of the billing cycle. You'll see interest credited to your account at the end of the month, even though the bank calculates the interest on a daily basis.

Compounding

Compounding interest is one of the great powers of building wealth over time. Compounding interest follows a path of accelerated growth with time. You can imagine it like a snowball growing as it rolls down a hill or a graph with a sharp accelerating curve upwards. Compound interest amplifies the growth of savings over time.

With compound interest, if you save $100 and get 1% annual compound interest, at the end of the first year, you'd have $101. At the end of 30 years, you'd have $134. If, instead of 1%, you were getting 5% interest, that same $100 would be worth $432 after 30 years. That's the power of compounded growth. Finally, if instead of just $100, you saved $500 a month, after 30 years with 5% interest, you'd have $399,065.28. 

Fees And Charges

Interest-bearing checking accounts are generally low-fee. However, you might have to pay a monthly fee, maintenance fees or transaction fees. These range from a new dollar a month to $40 or more for overdraft or low balance fees. Compare these fees to possible interest earned to weigh whether these accounts make sense for you. 

FDIC Insurance

FDIC insurance coverage protects the account holder's funds up to $250,000 per account holder. That means you can keep up to $250,000 in an interest-bearing checking account, and if anything happens to the bank, your money is guaranteed by the government. 

Interest Rate Changes

While many high-yield checking accounts advertise interest rates up to 5.30% APY, that may be an initial or introductory interest rate for a set period, after which interest rates drop. With interest-bearing checking accounts,interest rates may fluctuate over time based on larger market economic influences that affect interest rates of banks, like the  supply and demand of credit. Your bank may also change the interest rate based on the account balance, with higher interest rates only available for high account balances. 

How Much Interest Does A Checking Account Pay?

Interest earning checking account definition is simply to earn interest, but that can vary widely. Typical interest rates offered by checking accounts are from 0% to 0.5%. Interest bearing checking accounts can offer APY up to 5.30%, but many also offer interest rates of 1% to 3%. 

Account balance, bank, type of account, and average national interest rates can all affect the interest rates you can expect. To get the best rates, it's essential to compare interest rates when choosing a checking account. 

Different banks and account types may offer varying rates. In order to take advantage of the best offers, you might be required to transfer $1,000 to $20,000 or more within the first month of account opening. Or, you might have to maintain a certain minimum balance to earn the highest interest rates. Know the requirements to choose the best fit for how you plan to use the account!

Benefits Of Having An Interest Bearing Checking Account

If you're considering opening an interest-bearing checking account, here are key advantages:

Earning Interest On Deposited Funds

You'll earn interest on all deposited funds within the interest-bearing checking account. Be sure to check interest rates and APY to ensure you're earning more than current inflation rates. Generally, interest calculations are based on daily account balance, but interest payouts are monthly.

While most financial planners advise focusing on investment accounts and high-yield savings accounts, an interest-bearing checking account allows you to optimize earnings on deposited funds you use regularly, potentially helping you to reach financial goals faster.

Convenient Access 

Unlike savings or investment accounts, which may limit withdrawals or have penalties for certain withdrawals, interest-bearing checking accounts give you easy access to funds through various means, such as checks, debit cards, and online transaction options. You can withdraw funds at any time.

An interest-bearing checking account offers the convenience of managing day-to-day expenses with a transactional account while still enjoying the benefits of earning interest on the balance, potentially compounding financial growth

Enhanced Financial Growth And Savings Potential

An interest-bearing checking account's ability to compound interest over time leads to enhanced financial growth compared to a non-interest-bearing account.

For example, if you maintain a balance of $2,000 in the interest-bearing checking account with an APY of 5%, you'll earn $100 a year without doing anything. If you allow that growth to compound, you would have $$5,306.60 after 20 years, assuming you maintain the base balance of at least $2000 and allow all interest earnings to compound. 

However, as most people withdraw and add funds to checking accounts daily or monthly, the exact compound earnings will depend on how you use the account. The long-term benefits of using an interest-bearing checking account mean you can grow savings effectively.

Balancing Liquidity And Interest Earnings

Liquidity means how easily you can access money without losses or delays. A checking account offers maximum liquidity. The bank knows you could withdraw funds at any time, which means they don't use your funds for other investments and pay you interest. 

Interest-bearing checking accounts shift this balance, as they still offer maximum liquidity, but you'll be able to earn interest on the balance.  This allows you to strike a balance between having liquid funds readily available for expenses and maximizing interest earnings.

Flexibility And Convenience

Like most other checking accounts, interest-bearing checking accounts offer maximum flexibility and convenience, with access to online banking, mobile apps, and automated transactions in most cases. These features improve account management and enhance the overall banking experience, making it easier to manage expenses and check balances to reach savings goals. 

Using an Interest Earning Checking Account

Checking accounts are usually used for daily expenses like utilities, transportation, and food. You might pay directly with a debit card or use a credit card and pay with a linked checking account. Either way, an interest-earning checking account means you can earn more on all your money. 
Whether funds are in the account for a day or years, with a high-interest checking account, you'll have a better chance of staying ahead of inflation and earning some income on all your money. Along with high-yield savings accounts, retirement accounts like IRAs, and other investment accounts, these checking accounts can help ensure your money is working to help you reach your financial goals.

Frequently Asked Questions

Q

How does an interest-bearing checking account work?

A

An interest-bearing checking account works like a standard checking account. You can access funds at any time by checks, debit cards, or online transfers, but you also earn some interest on the balance in the account. This allows you to earn more on all savings, even in a checking account.

Q

What are the advantages of having an interest-bearing checking account?

A

Advantages of an interest-bearing checking account range from greater earning power to flexibility to access funds at any time. These accounts offer the best of both high-yield savings accounts and standard checking accounts.

Q

Are there any requirements to open an interest-bearing checking account?

A

Generally, anyone can open an interest-bearing checking account. Some banks may require you to maintain a minimum account balance, set up automatic transfers, or pay a monthly fee. Check with your bank to understand any requirements to earn interest with a checking account.

About Alison Plaut

Alison Plaut is a personal finance writer with a sustainable MBA, passionate about helping people learn more about financial basics for wealth building and financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgage, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she is a regular contributor for Benzinga.