Interest Checking Accounts Explained
The first thing to understand about checking accounts is that not all of them earn interest. Knowing the difference between those that do and those that don’t is critical in selecting the right account. There are reasons why someone would not want a checking account that earns interest. Primarily, interest checking accounts tend to have balance minimums and if those minimums are not kept, the fees incurred can negate any interest gained.
This article will focus on accounts that earn interest. While traditional checking accounts tend to earn only a few percentage points of interest, some accounts may offer higher interest rates as an incentive to hold a certain balance.
Introducing the Interest-Bearing Checking Account
Interest checking accounts, also known as high-yield checking accounts or reward checking accounts, are bank accounts that combine the features of traditional checking accounts with the ability to earn interest on the deposited funds. As an example, Amerant Bank offers the Relationship Interest Checking account, which when coupled with a Relationship Money Market account, can earn the account holder interest in two different accounts.
Benefits of an Interest-Bearing Checking Account
The most common benefits of interest-bearing checking accounts include:
- Higher interest: One of the primary benefits of an interest-bearing checking account is the ability to earn interest on deposited funds. While high-yield savings accounts and CDs may offer more interest, these accounts can still provide comparable interest rates.
- Convenience: Interest-bearing checking accounts combine the functionality of a traditional checking account with the opportunity to earn interest. This means individuals can conveniently manage their day-to-day transactions while also earning a return on their funds.
- Easy access to funds: Unlike certain savings accounts or investment options, interest-bearing checking accounts offer easy and immediate access to funds with no limits on withdrawals. Account holders can easily withdraw cash based on an available balance, write checks, use debit cards, or conduct online transactions, providing flexibility and convenience in managing their financial needs.
- Transactional capabilities: Interest-bearing checking accounts provide individuals with a range of transactional capabilities. These include options such as direct deposits, electronic transfers, bill payments, free payment services such as Zelle®, and ATM access, enabling account holders to effectively manage their financial transactions without limitations.
- FDIC/NCUA insurance: Many interest-bearing checking accounts are offered by FDIC-insured banks or NCUA-insured credit unions. This insurance protects deposited funds, up to the specified limits, in case of the financial institution’s failure. For example, Amerant Bank offers Protection+, which provides access to FDIC insurance for accounts beyond the traditional $250,000 limit.
- Combining savings and spending: Interest-bearing checking accounts allow individuals to keep their funds in one account, effectively combining their spending money and potential savings. This can be convenient for those who prefer to have a single account that provides both transactional flexibility and the opportunity to earn interest on their balance.
Drawbacks of Interest Checking Accounts
While interest checking accounts offer the opportunity to earn interest, they may have certain limitations. These limitations can include restrictions on the number of monthly transactions or a cap on the balance that qualifies for the higher interest rate. These drawbacks can be mitigated by keeping the requisite amount of funds in the account from month to month to avoid any additional fees.
The account holder needs to review the terms and conditions of the account to understand any limitations or requirements.
How Do Interest Checking Accounts Work?
Interest checking accounts work by providing individuals with the opportunity to earn interest on their deposited funds.
Once the account is opened, the account holder may need to maintain a minimum balance to qualify for the offered interest rate and avoid monthly maintenance fees. The interest rate on an interest checking account is usually variable, meaning it can fluctuate over time based on market conditions.
The interest on the account balance is calculated daily and credited to the account monthly. The amount of interest earned depends on the balance in the account and the interest rate provided by the financial institution.
Account holders can utilize their interest checking accounts for various transactions, such as depositing and withdrawing funds, writing checks, making purchases with a debit card, and accessing online or mobile banking services. These accounts provide easy and convenient access to funds.
Almost all financial institutions allow access to these accounts through an online interface and, oftentimes, via a mobile app.
Interest Checking Accounts vs. Savings Accounts
With interest checking accounts, individuals can engage in all types of checking account transactions while earning interest on their deposited funds. These accounts are designed to provide convenient transactional capabilities, such as depositing and withdrawing money, writing checks, and using debit cards for everyday purchases. Interest checking accounts prioritize the accessibility and flexibility of funds for daily financial needs.
On the other hand, savings accounts have fewer transactional capabilities, may have higher minimum balance requirements, and typically offer limited withdrawals compared to the more flexible nature of checking accounts. Each type of account serves distinct purposes and helps individuals manage their finances based on their specific goals and needs.
Most individuals benefit from having both checking and savings accounts. Checking accounts can provide day-to-day transactional capabilities, while savings accounts act as a pool of funds from which individuals can draw to fund major or emergency expenses.
Interest Checking Accounts vs. Money Market Accounts
Money market accounts typically require a higher minimum balance than interest checking accounts. They may also come with more restrictions on the number of withdrawals or transfers that can be made each month.
While money market accounts provide some flexibility in accessing funds, they are intended for individuals who want to save and earn a competitive interest rate while maintaining a certain level of liquidity.
Both checking accounts and money market accounts are typically offered by financial institutions such as banks or credit unions, and they may be insured by the FDIC or NCUA to protect depositors’ funds.
Do Interest Checking Accounts Compound Interest?
Yes, interest checking accounts will compound interest periodically. Compound interest grows the account holder’s balance faster than simple interest since the interest earned each period is used to calculate the new balance on which interest is calculated.
The exact frequency of compounding can be daily, monthly, quarterly or annually, depending on the policies of the financial institution.
Compound interest can be a powerful tool for growing the balance in an account, especially during times of high-interest rates as determined by government monetary policy.
All in all, an interest checking account allows individuals to earn interest on their deposited funds while providing the convenience of a checking account for day-to-day transactions. By maintaining a minimum balance and meeting the account requirements, individuals can enjoy the benefits of earning interest while having easy access to their money.
Learn more about Amerant Bank’s checking solutions at https://www.amerantbank.com/personal/personal-checking/ and follow Amerant on Facebook, Twitter, Instagram, and LinkedIn @AmerantBank.
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