Definition and Example of an Interest Checking Account
An interest checking account is a checking account that accrues interest on the money in it. As long as the requirements to earn interest are manageable, the interest benefit of these accounts gives savers an opportunity to grow their deposits on autopilot. The interest is usually expressed as an annualized rate known as "annual percentage yield" (APY). It's calculated as a percentage of your balance and paid out periodically.
- Alternate name: Interest-bearing checking account
For example, if you deposit $10,000 in an interest checking account with a 0.20% APY, after a year of savings you'll earn an extra $20.00.
How an Interest Checking Account Works
Traditionally, checking accounts are not interest-bearing accounts as savings accounts are, as they’re designed for short-term cash that you’ll spend soon. Savings accounts are better-known for earning interest, but these accounts ordinarily limit how often you can make certain withdrawals from the account.
Interest checking accounts, available from banks and credit unions, incorporate key features from both of these account types. You can use them as standard checking accounts; they come with a debit card for purchases, checks for spending, automatic electronic payments, and online bill payments. All the while, you'll earn interest on your balance as with a savings account. This interest rate is applied to your balance and paid out according to the terms in your contract with the bank or financial institution.
The catch is that you'll sometimes need to pay a higher monthly fee and maintain a minimum account balance to earn that interest in comparison to what you'd pay for a standard checking account. However, some interest checking accounts, usually online-only accounts, impose none of these requirements.
For example, suppose that ABC Bank offers up to 0.60% APY on its interest checking account but not on all balances. It offers 0.60% APY on balances of $25,000 and above, 0.30% on balances between $10,000 and $24,999, and only 0.20% on balances below $10,000. In addition, you need to maintain an average monthly balance of $15,000 to avoid a $15 monthly fee. You'll need to maintain a minimum average monthly balance of $15,000 to avoid fees, but you'll need to keep another $10,000 in the account to earn the top rate.
The interest you earn on these accounts is subject to taxation.
Types of Interest Checking Accounts
These accounts fall into one of two categories:
- Standard interest checking accounts
- Reward checking accounts
Standard Interest Checking Accounts
These accounts are available at both brick-and-mortar and online-only banks and credit unions and pay less interest but impose minimal requirements.
- Requirements to earn interest: You'll typically earn interest simply by holding deposits that meet the institution's threshold for earning the stated APY.
- Interest structure: Some pay the same interest rate on all balances, whereas others pay a higher rate as your balance increases, as in the earlier example of ABC Bank.
- Fees: Potential fees include monthly maintenance fees, overdraft fees, and foreign ATM fees.
Capital One 360 Checking, Ally Interest Checking, and Citi Elevate High-Yield Checking are all examples of this type of interest checking account.
Rewards Checking Accounts
Sometimes called "high-yield" or "high-interest checking accounts," these accounts usually pay a more competitive APY than standard interest checking accounts—sometimes even higher than long-term certificates of deposit (CDs)—as a reward for meeting more stringent requirements. In addition, they're harder to find—community banks and credit unions are your best bets.
- Requirements to earn interest: Common requirements for earning the lucrative APY on these checking accounts include the need to use your debit card a certain number of times per month (and in some cases, for a certain purchase amount each time), receive one or more direct deposits or ACH payments each month, enroll in online banking, and receive electronic bank statements.
- Interest structure: These accounts often come with a tiered interest structure, meaning that you'll earn the top rate on balances of up to a certain amount and a lower rate beyond that balance. If you don't meet the requirements in a given month, you'll typically earn interest at a lower rate. For example, a bank might offer up to 4% APY on its rewards interest checking account but only offer the top rate on balances of up to $3,000, 2% on balances between $3,000 and $10,000, and only 0.10% on balances above $10,000.
- Fees: The upside of these accounts is that they often impose no minimum balance requirement or monthly fee. However, they're still subject to other common fees, such as overdraft and foreign ATM fees.
The Consumers Credit Union Reward Checking Account and Elements Financial Credit Union High Interest Checking Account are examples of this type of account.
To meet the required number of debit card transactions each month to earn the top interest rate, consider setting up recurring purchases such as gift cards or small donations to charities.
Interest Checking Accounts vs. Money Market Accounts
While not technically checking accounts, money market accounts are similar accounts that may serve as an alternative for consumers who seek an attractive APY without the tougher requirements of a rewards checking account.
|Interest Checking Account||Money Market Account|
|More rules to earn interest on rewards accounts||Fewer requirements to earn interest|
|No withdrawal limits||Traditionally imposes withdrawal limits|
|Better for everyday spending||Better for emergency savings or occasional spending|
In terms of account features, money market accounts are similar to standard interest checking accounts; you generally only need to keep qualifying deposits in the account to earn interest, which might be the same at all balance tiers or yield more interest as your balance increases. Monthly maintenance fees can apply.
These accounts fall under the category of savings accounts but typically pay more than traditional savings accounts. In addition, they often pay more interest than standard interest checking accounts but less than rewards checking accounts.
Money market accounts typically offer a debit card and check-writing privileges. However, check writing is more limited, as are external transfers, as money market accounts, like savings accounts, have traditionally only allowed consumers to make six withdrawals per month.
The withdrawal restriction was lifted in April 2020 but may still apply at some financial institutions. Inquire with yours for the latest rules.
As such, money market accounts are a good fit for emergency funds but aren't designed for everyday spending. Interest checking accounts don't limit withdrawals in this way, making them more suitable for frequent check writing.
How to Get an Interest Checking Account
You can open an account online, or, if the financial institution has branches, in person. Simply search for the institution online to find and visit its website.
When you apply for an interest checking account, you'll be asked to provide some form of government identification, personal information such as your Social Security number, and an opening deposit (if required).
Many institutions will reference your ChexSystems report, which details your past deposit account activities, when deciding whether to approve or deny your application. If approved, you can register your account for online access and will receive your debit card in the mail.
- An interest checking account accrues interest on your account balance.
- Standard interest checking accounts offer less interest but fewer requirements and a simpler interest structure, whereas rewards checking accounts offer more interest in exchange for more requirements and a more complex interest structure.
- These accounts can be opened online or in person at banks or credit unions but may require a check of your ChexSystems report.
Axos Bank. "APY Interest Calculator."
Consumer Financial Protection Bureau. "Should I Get a Checking Account That Pays Interest?"
FederalReserve.gov. "Regulation D1 Reserve Requirements," Page 4.
Board of the Governors of the Federal Reserve System. "Federal Reserve Board Announces Interim Final Rule to Delete the Six-Per-Month Limit on Convenient Transfers From the "Savings Deposit" Definition in Regulation D."
Experian. "Why Was I Denied a Checking Account?"