What is an interest checking account and should I get one?

Woman using digital tablet on sofa, lookin up no interest checking accountsImage: Woman using digital tablet on sofa, lookin up no interest checking accounts

In a Nutshell

Many traditional checking accounts don’t earn interest. And most checking accounts that do pay interest pay at very low rates, with strings attached, such as a higher minimum balance requirement.
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You can think of a checking account as the workhorse of financial accounts.

It’s the account most people use to store the income from their paychecks and use the money to pay bills and fund other accounts.

But many checking accounts don’t earn interest. Savings accounts earn interest, but don’t offer the same flexibility of checking accounts, making them less-than-ideal for day-to-day transactions.

Interest checking accounts give you the best of both worlds — an interest-bearing account connected to a debit card that you can use for daily purchases. But these accounts also have their drawbacks.

What is an interest checking account?

An interest checking account is a checking account that has an annual percentage yield (or APY) and earns interest. But the trade-off for this perk is that the account may require that you maintain a certain balance or pay monthly account maintenance fees.

Despite them both being interest-bearing bank accounts, interest checking accounts and savings accounts are like apples and oranges. Savings accounts are designed to stash cash for a longer term — like putting money away for a new car or an emergency. Financial institutions may also limit the number of withdrawals you can make from a savings account, though they’re no longer required to do so.

Like interest checking, a money market account also earns interest and might come with a debit card and checks. But like a savings account, a money market might limit you to a certain number of monthly withdrawals.

If you need regular access to your cash for everyday purchases without restrictions, and want to get some growth for your money, an interest checking account — over money market or savings accounts — may be the way to go.

How do interest checking accounts work?

An interest checking account works much like other checking accounts. After applying and being approved for an account, you can deposit money at branch locations, ATMs, by direct deposit or through transfer from another bank or account at the same bank.

You can withdraw money by transferring between accounts (either at the same bank or different ones), using your debit card at an ATM or to make a purchase, or writing checks. Although checks might seem like an antiquated way of managing payments, it still might be worthwhile to keep a few in the back of a drawer. That’s because you never know when a landlord or service provider could request one.

Learn about ATM fees and how to avoid them

What are some common account requirements?

Before shopping for an interest checking account, here are a few things you should know.

  • Qualification rules — To open a checking account (whether at a credit union or bank), you may need a photo ID and your Social Security number or taxpayer identification number. Accounts offered by credit unions will likely also have membership requirements.
  • Balance and account conditions — Depending on the account, the financial institution might require a minimum initial deposit, and you may need to maintain a certain daily balance to avoid fees. You also may need to follow rules — such as having a certain number of debit card transactions or deposits per month — to qualify for interest.
  • Monthly maintenance fees — Interest checking accounts may have monthly fees that could be higher than checking accounts that don’t offer interest. To get a fee waiver, you might also need to maintain a higher average daily balance in the account.

What are some advantages of interest checking accounts?

  • You earn interest (possibly for free). Many traditional checking accounts don’t earn interest. With an interest checking account, your money might work a bit harder for you while it’s parked. Also,some interest checking accounts have no monthly fee, so you might be able to enjoy the benefits of interest earned without that monthly cost.
  • You get flexibility. Since there isn’t a transaction limit like with a savings account or money market account, you won’t have to budget your withdrawal transactions.

What are some disadvantages?

  • Interest may come with strings attached. You might have to meet monthly requirements to earn the highest interest rate.
  • The account may have a high maintenance fee. Many checking accounts come with monthly maintenance fees. You can often get them waived if you meet certain criteria, such as maintaining a certain balance or engaging in a certain number of transactions. But if you fail to meet the criteria, the monthly service fees on an interest-bearing checking account are generally higher than those on non-interest accounts.
  • Interest rates are very low. The interest rates on most interest checking accounts are generally very low. More on that next.

How much interest does a checking account pay?

Interest on checking accounts varies, depending on the financial institution and type of checking account. At brick-and-mortar banks, it’s not uncommon to see an account APY of around 0.01%. High-yield checking accounts may bring a bit more to the table percentagewise, but their higher rates are still generally less than the rate you could get on a savings account.

Even with the power of compound interest working on your money’s behalf, relatively low checking interest rates mean your checking account will earn very little for you — even if you carry a higher balance.

Where can I find an interest checking account?

You might find interest checking accounts at your neighborhood bank, though the APY may not be anything to write home about. But interest isn’t the only factor to consider when weighing your banking options. Check out the fine print, ATM fees, account features and account holder perks when making your decision.

If finding the best high-yield rate for a checking account is your top priority, you might want to look at credit unions or dig into what online banking has to offer. Credit unions do have membership requirements, but people who meet the requirements may be able to score rates of 3% APY or more.

Should I get an interest checking account?

Whether interest checking is right for you depends on your situation and your financial goals. If you’re looking for an account for bills and daily transactions, an interest-bearing checking account can give you those features plus the added benefit of some interest. If you qualify for a fee-free account and meet the requirements to earn the highest APY, your money can grow while it’s working for you.

If your goal is long-term savings and more growth, you might be better off shopping for a savings account that pays a bit more interest and that’s not tied to a debit card that you can swipe freely. For money you plan to stockpile over, say, five, 10 or 15 years for a long-term goal (like your child’s college savings), you might want to consider an investment account instead.

Next steps

Before choosing an interest-bearing account, consider what your goal is and how you plan on using the money to make sure it’s a checking account, rather than another type, that you need.

Then think about the balance that you’re able to maintain. Some financial institutions require that you have a certain balance (or set up direct deposit) to earn interest and avoid fees.

Next, check with your existing financial institution to see what interest-bearing accounts are available. Finally, explore credit unions and other online banks to see if you can qualify for a higher APY elsewhere before making your final decision.

About the author: Taylor Medine is a freelance writer who’s covered all things personal finance for the past seven years. She enjoys writing financial product reviews and guides on budgeting, saving, repaying debt and building credit. … Read more.