Financial institutions are providing more options in checking accounts. And more of those options pay interest. Essentially the interest-paying accounts fall into two categories.
One is being called the plain-vanilla variety. The other, the rewards or high-yield kind. Also, online checking accounts will tend to provide a higher interest rate than those in brick-and-mortar. That’s because online or Internet banks and credit unions can afford to pay more. They don’t have the real estate and manpower expenses of brick-and-mortar. Some financial institutions may offer both traditional, that is brick-and-mortar, checking accounts as well as online ones. Therefore, you might enter the neighborhood bank and have to choose between both types.
The plain-vanilla checking accounts may pay as low a rate as 0.05 percent. For accounts opened in online financial institutions, that could reach 2 percent or more. To attract new business, the bank or credit union might offer teaser rates for a short period of time. Depositors should be aware that’s only for the time of the promotion, not long term. Moreover, there is usually fine print declaring that the rate is subject to change. Given the probability that what started out as an okay rate will drop, other criteria should be used in selecting where to open an account. At the top of the list is the institution’s reputation. That includes its record for customer service. Of course, funds should be covered by the Federal Deposit Insurance Corp. (FDIC).
Even with online banks, depositors aren’t going to get rich with these plain-vanilla account. Why they stick with them is that the package tends not to come with a long list of restrictions. They opt for the freedom of not having to worry about maintaining a minimum balance or limiting the number of transfers. In this low-interest environment, they are grateful that they are receiving some interest on their checking account. Information about the low-end interest rates is available on the Internet under keyword phrases such as “Interest checking” and “interest earning check accounts.” Also, you can go in person to brick-and-mortar banks, asking about both traditional and online accounts.
The rewards or high-yield accounts can pay as high as 4 percent interest. The list of them can be found at CheckingFinder and DepositAccounts.com. If you tend to maintain a large balance in your checking account and are diligent about complying with the rules, this could be a revenue-producer.
Here are some of the common requirements:
- Minimum balance. It’s necessary to find out how the financial institution calculates that. If it’s daily, then if you dip below for even a day, you could be penalized for the whole month. So, you also must find out what the penalties are. Will you not only pay a monthly service fee but also a fee for every check you wrote that month? In addition, the interest rate for that month could drop from 4 percent to 1 percent.
- Limit on the number of transfers per month. If you actively manage your financial affairs among several accounts, this wouldn’t be for you.
- A certain amount of debit transactions monthly. Ten is standard. Fall below that and you could incur a penalty. Financial institutions make money on debit transactions.
- Direct deposit. This is becoming a standard requirement in many kinds of online checking accounts, not just high-yield ones.
- Automated monthly bill payments. This could lead to falling below the minimum balance or even overdrafts, if there is high fluctuation in the amount of monthly bills.
Another complexity is that the high-yield interest rate may only apply to a certain maximum balance. That might be $25,000. Funds above $25,000 do not qualify for the high-yield rate. Therefore, another decision must be how much to put in a high-yield account.
Deciding if you want a checking account earning interest and how much interest has become yet another financial issue which requires careful thinking. The wrong checking account could wind up costing you in fees, not building revenue through interest.