Can Checking Accounts Earn Interest?

Checking accounts can earn interest, offering a way for account holders to grow their funds while maintaining liquidity for daily transactions. While traditional checking accounts often yield little to no interest, various account types are designed to provide a financial return.

Understanding Interest-Bearing Checking Accounts

An interest-bearing checking account allows you to earn a return on money kept readily available for spending. The rate at which interest is earned is typically expressed as an Annual Percentage Yield (APY), which accounts for both the stated interest rate and the effect of compounding. APY provides a more complete picture of the actual annual return than a simple interest rate.

Compounding interest means that the interest you earn is added to your principal balance, and then the next interest calculation is based on this new, larger amount. For checking accounts, interest is commonly accrued daily and compounded monthly. This approach allows your funds to grow over time, even as you use the account for regular transactions.

Types of Interest-Earning Checking Accounts

Several types of checking accounts offer interest, each with distinct features and requirements. High-yield checking accounts aim to provide interest rates significantly above the national average for checking accounts, which is around 0.07%. These accounts often require specific activities to qualify for the higher rates, such as a minimum number of debit card transactions, setting up direct deposits, or enrolling in e-statements.

Rewards checking accounts are another type, offering interest or cash back when certain activity requirements are met. For example, you might need to make 10 to 15 debit card transactions monthly, have at least one direct deposit, or use online bill pay. Some institutions may also offer higher interest on checking accounts when they are linked with other accounts, such as savings or investment accounts, within the same financial institution. These linked accounts can sometimes provide tiered interest rates, where higher balances or combined balances across accounts earn a better return.

Key Considerations for Interest-Earning Checking Accounts

When considering an interest-earning checking account, it is important to evaluate several practical factors that can influence the actual benefit. Fees can significantly reduce any earned interest, with common charges including monthly maintenance fees, ranging from about $5 to $20, or overdraft fees, which can be $25 to $35 per occurrence. Some accounts may also impose minimum balance fees, typically $10 to $25, if your balance falls below a set threshold.

Many interest-earning accounts have specific requirements that must be met to earn the advertised interest rate or to avoid fees. These often include maintaining a minimum daily or average balance, making a certain number of debit card transactions each month, or setting up direct deposits of a minimum amount. Interest rates might also be tiered, meaning a higher APY applies only to balances up to a certain cap, with lower rates applying to amounts exceeding that cap.

Distinguishing from Other Account Types

Interest-bearing checking accounts serve a distinct purpose compared to other common deposit accounts. The main advantage of an interest-bearing checking account over a traditional one is the ability to earn a return on funds used for everyday expenses.

Savings accounts are generally intended for storing money and typically offer higher interest rates than traditional checking accounts, with the national average for savings accounts around 0.39%. However, savings accounts may have limitations on the number of monthly withdrawals or transfers, though federal regulations regarding these limits were lifted in 2020, many banks still impose their own restrictions. Money market accounts (MMAs) often combine features of both checking and savings accounts, offering interest rates that can be higher than regular savings accounts while providing some transactional access, such as check-writing or a debit card. MMAs may also have higher minimum balance requirements and typically impose transaction limits, often around six to ten per statement cycle, on certain types of withdrawals.