What Is An Interest Checking Account? (2024)

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Unlike savings accounts, which are designed for parking your money, checking accounts are transaction accounts designed for everyday use. Money goes in when you get paid or add funds and out when you spend with your debit card or make a transfer. They offer convenience above all. Most of the time, checking accounts don’t earn interest. But this isn’t always the case.

Interest checking accounts earn interest but otherwise work like regular checking accounts. Learn the pros and cons of these accounts and what you should know before opening one.

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What Is an Interest Checking Account?

An interest checking account, also called an interest-bearing checking account, is a type of checking account that earns interest. Earnings are represented by both simple interest, the interest rate calculated on your balance, and annual percentage yield (APY), the total amount you would earn in a year with compound interest.

Most standard checking accounts don’t earn any interest or have rates so low (such as 0.01% APY) customers may not even realize their account is technically earning interest.

Interest checking accounts, on the other hand, can offer much more noticeable growth. Still, rates on these typically don’t compare to the rates available on high-yield savings accounts, money market accounts or CDs and may come with activity requirements to earn interest.

How Do Interest Checking Accounts Work?

In most ways, interest checking accounts work like regular checking accounts. You can deposit and withdraw money at any time, use a debit card for purchases and use ATMs for cash. Many people receive direct deposits in their checking accounts and link to other bank accounts for easy transfers.

Interest checking accounts also earn interest, which is typically calculated as a percentage of your balance. Banks may calculate your interest earnings daily, monthly or even quarterly, depending on the compounding schedule, and credit earnings into your account regularly (usually monthly).

To earn interest or qualify for the best rates, some banks require you to meet balance or activity requirements. For example, the Axos Bank Rewards Checking account has a variety of steps you can take to earn a higher interest rate, including receiving a certain amount in direct deposits each month and maintaining a certain minimum balance in investing accounts.

How Do Interest-Bearing Accounts Differ From Other Checking Accounts?

Interest checking accounts have more similarities with traditional checking accounts than they do differences. Both regular and interest checking accounts may or may not have maintenance fees, account balance minimums and initial deposit requirements.

The primary difference between interest and non-interest accounts is the ability to earn interest on your balance. Interest accounts may have a higher monthly fee or higher balance requirements to waive fees, but this varies by institution.

Interest checking accounts are also not quite the same as rewards checking accounts, though some rewards checking accounts are interest accounts. A rewards checking account is any type of checking account that earns rewards, which may be in the form of interest, cash back, points or other perks—or a combination of such benefits. The Aspiration Spend & Save account, for example, earns both cash back on debit card purchases and interest on your balance.

How Do Interest Checking Accounts Compare to MMAs?

Money market accounts (MMAs), which are meant for saving, often have more restrictions than checking accounts. While money market accounts regularly offer the ability to write checks or even use a debit card, they may restrict the number of monthly transactions you can make.

The Federal Reserve previously limited withdrawals from savings accounts (including MMAs) to six per statement period under Regulation D. However, Regulation D was modified in 2020, and this limit was removed indefinitely. Now, many money market accounts allow unlimited transactions, though some still enforce limits. Interest checking accounts don’t limit transactions.

Money market accounts also tend to earn higher interest rates than interest checking accounts, as well as high-yield savings accounts.

Pros of Interest Checking Accounts

  • Earn money easily. The main benefit of an interest-bearing checking account is that you can make some money on your balance.
  • More flexible than other interest accounts. Savings accounts, certificates of deposit and MMAs earn interest but have more restrictions than checking accounts.

Cons of Interest Checking Accounts

  • Rates aren’t always competitive. Compared to savings accounts, interest checking accounts typically earn less interest. You can often earn more elsewhere.
  • Interest might come with caps or requirements. Some banks offer appealing interest rates for their checking accounts that only apply up to a maximum balance, and many accounts have balance or activity requirements to earn the best rates.

Do All Checking Accounts Earn Interest

No, not all checking accounts earn interest. Many traditional checking accounts with big banks earn no interest at all, and some that do earn interest pay just 0.01% or 0.02% APY. If a checking account has competitive rates, it may be referred to as a high-yield checking account. Only a small portion of interest checking accounts earn rates comparable to savings accounts.

Online banks tend to offer better interest checking accounts—with higher rates, fewer fees and more perks—than traditional accounts.

How Do Banks Make Money From Checking Accounts?

Banks make money from checking accounts, and many other types of bank accounts, through fees. These include banking fees such as monthly maintenance fees, overdraft fees and transfer fees, as well as charges for other types of financial services, like loan interest and credit card annual fees. Fees typically make banks more than enough money to make up for the interest they pay to consumers.

The best interest checking accounts do not charge monthly fees. Many online institutions, such as LendingClub Bank and Axos Bank, and credit unions, such as PenFed Credit Union and Consumers Credit Union, offer no-fee checking accounts that earn interest.

Bottom Line

Interest checking accounts are handy transaction accounts that can help you grow the money you’re not looking to put away. Unlike different types of savings accounts that expect you to avoid taking out funds or even lock them up, interest-bearing checking accounts permit you to deposit and withdraw cash freely while earning steady interest on anything left in the account.

Used alongside higher-earning accounts, interest checking accounts can help you maximize both your earnings and cash access.

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What Is An Interest Checking Account? (2024)
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