Understanding Checking Account Interest Rates

It’s difficult to earn interest on your checking account alone, but with good planning you can make sure your money goes far. FindABetterBank can help you find the right checking and savings accounts to help you get the best bang for your unused buck.

Earning interest on your checking account nowadays is, well, difficult. And when you do, it’s not easy get an interest rate that’s very impressive. If you’re looking for ways to earn money, your time may be better spent looking at savings accounts, money market accounts, or more long term investments like IRAs, bonds, or mutual funds.

But with that said, earning interest on your checking account balance is always a bonus to the account. When you open an interest checking account keep in mind these qualities:

“Interest Earning” doesn’t mean you’ll earn much.

A checking account can be called an “interest-bearing checking account” when you earn any amount of interest. Any. When choosing accounts, check how much interest is actually earned. Low-end checking accounts will typically earn between 0.05% and 0.5% APY, while high-end accounts may earn more. The best interest rates are usually earned on online accounts and “special” accounts, but make sure you know the terms before signing up for either. Online accounts don’t fit every lifestyle, and special accounts may only have a bonus interest rate for a fixed number of months. Over time, an account with a high introductory interest rate might not earn you as much as another account without a introductory rate, depending on their base rates and tier levels.

Interest rates are often tiered.

Beyond the basic accounts, many savings and money market accounts have tiered interest rates. Tiers are defined by account balance — for example, the tiers may be $0-$100 for the first tier, $100-$1000 for the second, $1000-$5000 for the third and so on. You earn the interst rate assigned to whatever tier your balances lies in. Why should you keep this in mind? Because an account may be advertised as “Earn as much as X% interest!” but that X% may only be earned on high balances. If you don’’t keep the amount in the account that’s required to earn that amount, you won’t earn it. And often lower tiers don’t earn especially high rates — the high interest is only earned in that highest tier.

The best rates are often earned on accounts with restrictions or requirements.

Three types of accounts typically have higher rates — “online only” accounts, “Rewards” accounts and high-end accounts. While higher-end accounts require more money to avoid a service charge, they often earn the best savings rate the bank or credit union offers. (Note: General rule of thumb is: don’t open an account with a balance requirement that you can’t meet. If you don’t meet the minimum balance requirements for the account, your overall return is usually negative.) Online only accounts tend to earn higher rates than other savings accounts because it costs the bank less to maintain and manage those accounts. The drawback is limited access to the account at a bank branch. These accounts will either have limits to the number of times you can speak with a teller about them, or they’re offered by online only banks, which have no branches. “Rewards” accounts reward customers by offering bonus interest rates, no-fee non-bank ATM withdrawals if they meet certain criteria like a minimum number of debit card purchases in a month and enrolling in estatements instead of paper statements. Depending on your banking behavior, you may easily qualify to earn the rewards these accounts offer. Be careful, though — if you don’t meet the criteria in any given month, the rewards are not offered and the bank or credit union may charge you fees for activity that would otherwise be free (like ATM withdrawals).

Calculating Interest

Knowing an account’s interest rate is not often enough. You also want to know the APY.

APY stands for “Annual percentage yield” — the amount you would earn over a year if the interest rate stayed the same. An account’s APY is often very close to the assigned interest rate of deposit accounts checking and savings accounts, and in fact, it’s usually a better number to use when comparing accounts. Most of the time, savings accounts offer compound interest, which means daily or monthly the interest you earn is added to the account balance. Even if the interest rate doesn’t change, the amount of interest you earn each month will change as the account balance, or “principal,” grows.

Occasionally you will find accounts with multiple APYs — a “Minimum APY” and a “Maximum APY.” These accounts earn the interest a little differently — the interest rates is only earned on the amount of the balance within each tier. When opening one of these accounts, make sure to speak with a representative about the specific APY you will earn on the amount of money you put into the account.