Do checking accounts earn interest?
Quick insights
- Most traditional checking accounts do not earn interest.
- A small portion of checking accounts, known as interest-bearing or premium accounts, may earn monthly interest on your balance.
- Traditional checking accounts typically offer unlimited transactions and access to debit cards and checks.
While checking accounts may provide a number of features, such as access to a debit card and checkbook, their potential to earn interest is generally low. However, a small portion of checking accounts may earn interest. These are known as interest-bearing or premium checking accounts.
Let’s learn more about the features offered by both traditional and premium checking accounts, as well as how you might consider choosing between them.
Traditional checking accounts
Traditional checking accounts may be a way to receive and spend money for everyday transactions and are offered by most banks. Traditional checking accounts generally do not earn interest, as they are primarily intended for daily transactions and frequent withdrawals rather than savings.
Pros and cons of traditional checking accounts
Here are some of the advantages and disadvantages of traditional checking accounts:
Pros:
- Low minimum balance: Since checking accounts are not intended to store larger amounts of savings, financial institutions tend to have lower balance requirements, which may make it easier to open one and potentially avoid fees.
- Unlimited transactions: Account holders may be able to make unlimited monthly transactions, including debit card payments, ATM and in-person withdrawals and online transfers.
- Access to debit cards and checks: Unlike savings accounts, checking accounts offer both debit cards and paper checks to use as a form of payment.
Cons:
- No interest earned: Traditional checking accounts generally don’t offer interest on the balance.
- Monthly service fee: If you don’t maintain a specific minimum balance, you may be charged a maintenance fee.
Interest-bearing checking accounts
Interest-bearing checking accounts offer many of the same everyday benefits as traditional checking accounts, but they also earn interest. Banks may offer interest-bearing checking accounts as a premium option, meaning that they may have higher minimum balance requirements and fees, but also may offer benefits like waiving the first few out-of-network ATM charges or free checks.
If you can meet the financial institution’s requirements, interest-bearing checking accounts may be able to grow unused balances in your account. Note that interest-bearing checking accounts tend to be less common than traditional checking accounts.
Pros and cons of interest-bearing checking accounts
Like traditional checking accounts, interest-bearing checking accounts offer some unique benefits, but there are some drawbacks to consider that may not make them suitable for everyone.
- Pros:
- Interest earnings: Your balance earns interest, typically monthly, so you can watch your account balance grow and compound over time.
- Easy access to funds: Account holders may enjoy liquidity and easy access to funds without penalties for excess withdrawals or transactions.
Cons:
- High balance requirements: Interest-bearing checking accounts often require higher minimum balances to earn interest or avoid monthly fees. The associated fees may be higher than those of traditional checking accounts.
- Lower interest: Interest-bearing checking accounts are designed to offer some of the benefits of a savings account, although their interest rates tend to be lower.
- Minimum transactions: Some interest-bearing checking accounts may require you to meet a certain minimum number of transactions and direct deposits a month to earn a higher level of interest.
Is a traditional checking account right for you?
A traditional checking account may be best for you if:
- Maintain lower account balances: You may benefit more from a traditional checking account if you maintain lower balances than the required amount for an interest-bearing checking account.
- Need to access your account with ease: Traditional checking accounts generally allow you to access your funds in many different ways, from automatic bill pay features to using your debit card to make transactions.
- Make frequent transactions: Traditional checking accounts typically offer unlimited transactions, allowing you to use your money as needed.
Should you get an interest-bearing checking account?
For some, an interest-bearing checking account may make sense in the right situation. This type of account may be ideal if you:
- Want to earn interest on your funds: If you want to earn interest on your everyday checking account balance, you may want to consider an interest-bearing checking account.
- Can maintain a higher balance: If you’re able to maintain a higher balance, then the benefits of an interest-bearing checking account may be right for you.
- Can pay relatively higher fees: If you’re comfortable with the possibility of paying higher fees than you would on a traditional checking account, then you may want to consider an interest-bearing checking account.
- Want to consolidate checking and savings accounts: You may want to keep all your funds in one account instead of using both a checking and a savings account to earn interest.
In summary
A checking account can be one of the key factors in a balanced financial plan. However, comparing checking and savings accounts may help you decide what type of account is best for you. Understanding your transaction habits and financial goals can help you choose the right one for your financial circumstances.
