Have you ever wondered why your savings account has a higher interest rate than your checking account?
Here’s a hint — flexibility.
It all comes down to what you use your account for — do you need easy access to your money for everyday transactions, or are you sitting on funds for later?
While the interest rate on checking accounts tends to be close to zero, there are exceptions. Read on to learn all about the best interest checking accounts.
What is a checking account?
Checking accounts are designed for maximum ease of access. They’re the accounts you use to pay bills, withdraw cash, and write checks — hence the name. No limit on transactions means you can deposit and withdraw money as often as you want.
The drawback of all that flexibility is that checking accounts earn little to no interest, unlike savings accounts. That’s because savings accounts are designed for saving and growing your money, which is why they sometimes have a monthly limit on how often you can withdraw cash without paying a fee. You can also get a certificate of deposit, which is like an untouchable savings account, so that you earn higher interest rates on savings that you can’t access.
Here’s a breakdown of the advantages and disadvantages of savings accounts vs. checking accounts:
- Unlimited transactions and easy access
- Low or no interest
- Better interest rates for earning while you save
- Limited transactions
- Fees on excessive withdrawals
What is an interest checking account?
As its name suggests, an interest checking account offers the flexibility of a checking account while also paying interest on the money you deposit. This interest is calculated as an annual percentage yield (APY) and is deposited into your account, usually monthly.
But there’s a catch — to be eligible for these higher interest rates, you have to meet specific requirements, like a minimum initial deposit or number of monthly debit transactions. Some interest checking accounts also charge monthly service fees, but these are often waived if you meet a minimum daily balance.
Interest checking accounts fall into one of two categories:
- Standard interest checking accounts
- Rewards checking accounts
Standard interest checking accounts
Standard interest checking accounts pay less interest but also impose fewer requirements. You generally only need to meet a minimum balance threshold to start earning interest. You might also earn a higher rate as your balance increases.
These accounts are available at bank and credit union branches or online. They might charge monthly maintenance fees, overdraft fees, and foreign-ATM fees.
Rewards checking accounts
Rewards checking accounts — also known as high-yield checking accounts — offer high interest rates in exchange for meeting stricter requirements, like a minimum number of debit card transactions, direct deposits, or ACH payments each month. You often must also enroll in online banking and receive electronic bank statements.
The interest rates on these accounts are often separated into tiers, meaning each requirement you meet brings you one step closer to the best rate. If you don’t meet the requirements in a given month, you’ll earn interest at a lower rate or none at all. You also tend to get the best rates on a limited amount and a lower rate on balances above that amount.
On the other hand, these accounts often charge no monthly fees, although they’re still subject to overdraft and foreign-transaction fees.
How to open an interest checking account
Opening an interest checking account is as easy as opening any other kind of account. After applying and being approved for an account, you can deposit money at branch locations, ATMs, or by direct deposit or bank transfer.
Depending on the financial institution, you may need to present a photo ID and your social security number or taxpayer identification number. If the account you’re applying for is at a credit union, there might be specific membership requirements.
Once your account is set up, you can begin making purchases, bill payments, or withdrawals with your debit card or paper checks. You can also wire money to a savings account.
Pros and cons of opening an interest checking account
Here are the pros and cons of having an interest checking account:
- You earn more interest than a traditional checking account.
- You maintain more flexibility than a savings account.
- There are low or no maintenance fees (depending on the account).
- Interest rates can be lower than some savings accounts, investment accounts, or certificates of deposit.
- You might have to meet monthly requirements to earn the highest interest rate.
- Potential penalty fees if you don’t meet balance requirements.
Best interest checking accounts
These are four of the best checking accounts that earn interest:
Heritage Bank eCentive checking account, 1.02 percent APY
The Heritage Bank eCentive checking account offers 1.02 percent APY on qualifying balances up to $25,000. To earn that rate, you need to make at least ten debit card transactions per month (excluding ATM transactions), have at least one direct deposit or automatic payment per month, and receive monthly eStatements. There are no monthly service charges or minimum balance requirements, but a $100 opening deposit is required.
Ally Interest checking account, 0.10 percent to 0.25 percent APY
The Ally Interest checking account earns you interest between 0.10 percent and 0.25 percent, depending on your account balance — you must maintain a $15,000 balance to reach the highest APY. The account has no opening deposit requirement and charges no monthly maintenance fees.
Thanks to its partnership with the Allpoint ATM network, you can use 43,000-plus ATMs nationwide for free, and Ally also reimburses up to $10 per statement cycle for out-of-network ATM fees charged by other banks.
Capital One 360 checking account, 0.10 percent APY
The Capital One 360 checking account offers 0.10 percent APY on all balances. The account requires no minimum opening deposit and charges no monthly maintenance fees. Capital One’s mobile banking app lets you manage accounts, make deposits using your smartphone, and receive account alerts.
TIAA Bank Yield Pledge checking account, 0.10 percent APY
The TIAA Bank Yield Pledge checking account pays interest at 0.10 percent APY on all balances. A minimum deposit of $100 is required to open an account, and there’s no monthly maintenance fee. Perks include extended warranty protection up to one year on eligible purchases, 60-day price protection up to $250 on eligible items, and up to $250 for buyer’s remorse or dissatisfaction within 90 days of purchase if the merchant won’t accept the return.
The bottom line
When shopping for an interest checking account, look for low account fees and high APY, and be sure the account is insured by the Federal Deposit Insurance Corporation (FDIC). Choosing a bank account that works for you is essential for building a balanced budget and reaching your financial goals.
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