Checking accounts are an essential tool for managing everyday finances and offer convenient access to funds. Some checking accounts can also earn you money. Learn about interest checking accounts, how they work and how you can make the most of this type of account.
[Read: Best Checking Accounts.]
What Is an Interest Checking Account?
Not all checking accounts offer the opportunity to earn interest. With a traditional checking account, you can manage daily expenses with deposits, withdrawals, transfers and purchases. Interest checking accounts offer an opportunity to earn interest on the money in the account while still offering the convenience of a traditional checking account. Still, these accounts aren’t a replacement for a savings or investment account, which will still get a better rate of return.
“Both types of checking accounts are intended for daily monetary transactions, as the funds are very liquid,” says money coach and educator Ohan Kayikchyan, a certified financial planner.
The key difference is in earning potential. Interest checking accounts typically offer a nominal interest rate that is calculated based on the account’s average daily balance. Traditional checking accounts offer no interest or it’s so small (an APY of 0.01%) as to essentially be nothing.
Interest Checking Account Fees
Another difference between regular and interest checking accounts are the fees and requirements. Interest checking accounts generally have more stipulations than regular checking accounts. For example, you may face a higher minimum balance requirement or need to make a certain number or amount of deposits to avoid a monthly maintenance fee.
Interest rates on interest checking accounts are typically lower than what you can earn on a savings account, certificate of deposit, or other investment options, but even minimal interest is more than nothing. As of May, the average interest checking account earned 0.07% monthly, while savings accounts earned 0.4% monthly, according to the Federal Deposit Insurance Corp. Despite the low average, there are a number of interest checking accounts, usually offered by credit unions and online banks, with higher rates.
“Interest checking accounts may pay interest based on balance tiers, so read the fine print to maximize your yield on the funds deposited,” Kayikchyan says.
[Read: Best Savings Accounts.]
Pros of an Interest Checking Account
Earning interest on funds in your checking account can be a win-win situation that allows you to take advantage of the flexibility and easy access to funds of a checking account while still earning interest. Consider these benefits:
— Funds in your checking account can grow over time as you earn interest on your balance.
— Accessing checking account funds is easier than a savings account, certificate of deposit or investment accounts.
— Deposits up to $250,000 are usually protected.
Anyone can also apply for an account by filling out an application and providing requested information such as your name, address, Social Security number and a government-issued photo ID.
“Interest checking accounts are suitable for all account holders, particularly those who want their money to work for them,” says Rosalyn Glenn, a financial planner at Prudential Financial in Columbia, South Carolina.
Cons of an Interest Checking Account
While interest checking accounts have benefits, you should also consider the drawbacks, including:
— You may need to meet minimum balance requirements to earn interest or avoid fees.
— Interest rates on checking accounts are typically lower than savings or investment accounts.
“If you don’t need the flexibility to access the funds in the account, consider putting the funds in a high-yield savings account or a CD instead of an interest checking account that will likely have a lower interest rate in comparison,” Kayikchyan says.
[Read: Best CD Rates.]
Factors to Consider When Choosing an Interest Checking Account
If you’re considering an interest checking account, here are some questions to ask to find the best account for you:
— How much interest will you earn?
— Are there interest tiers where you earn more interest for higher balances?
— What are the account fees and minimum balance requirements?
— What are the maintenance fees and requirements to waive them?
— What additional features and benefits, such as ATM access or online banking, does the account offer?
— Could your funds earn more money in a different interest-bearing account?
Maximizing an Interest Checking Account
You can make the most of your interest checking account by maintaining a sufficient account balance and meeting requirements necessary to waive any maintenance fees. If your interest checking account has interest rate tiers or promotional offers, you may be able to earn a more favorable rate if you meet the requirements of the offer.
“Maintain the minimum required balance to avoid the fees, and don’t use an interest-bearing account as your transactional account,” Glenn suggests. “It is best used as a holding account for short-term money needed for liquidity but not immediately.”
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What Is an Interest Checking Account? originally appeared on usnews.com
