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Money Management

11/11/2021

What’s an interest-bearing checking account?

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You’ve probably heard your parents or grandparents say “you can’t have your cake and eat it too”, to express how things work. It means that if you like something about one option, and something else about another, most of the time you’ll have to choose one over the other - you can’t have both. While you may have been annoyed to hear it at the time, you probably grew to realize that this tends to be true.

What does this have to do with bank accounts? Well, sometimes we feel this way when trying to decide what to do with our money. If you want to earn interest, then you need a savings account, but if you want to use your money, then you need a checking account. You can’t have both features in the same account. It could almost be summed up as, “You can’t spend your money and grow it too.”

So, when we hear of something called an interest bearing checking account or interest checking account, echoes of the old dessert-themed adage begin to fill our mind. A bank account that allows you to spend your money freely while earning interest at a really good rate? Surely I can’t have both. Spoiler alert - you can.

Interest Checking Accounts Explained

Interest checking accounts are exactly what they sound like – accounts that allow you to spend your money freely while you earn interest.

What’s even better, interest checking accounts sometimes have a higher interest rate than savings accounts, meaning your money will grow even faster. Whether or not you can find one with a better rate, will depend on the bank and how rates are doing overall.

Now, maybe you’re not familiar with what an interest bearing account is. Simply put, interest is money the bank pays you for holding an account with them. Not all accounts will earn interest, but if they do, it will be expressed as a percentage when opening an account. It will be called Annual Percentage Yield (APY), which is the actual percentage interest you will receive for the year. The higher the percentage, the more money you’ll receive in your account.

There is a group of interest checking accounts called High Yield Checking Accounts. They're interest checking accounts that offer interest rates that are higher than average. In general, checking accounts don’t offer interest rates and when they do, they typically aren’t very high. However, with high yield checking accounts, the rate is higher, making them more competitive with other options like savings accounts. A checking account would need to offer 1% interest or higher to be considered high yield, but rates change over time, so that may not always be the case.

Want to sign up for a High Yield Checking account? Get Southern Advantage here.

Or, if you’re 50+, check out Southern Elite.

Considerations for Choosing an Interest Checking Account

Banks sometimes require a larger initial deposit to open a checking account if it is interest-bearing. For example, at Southern Bank we require $100 to open our Southern Basic checking account (no interest) and $500 for our
Southern Advantage checking account (interest). That difference of $400 dollars needed for the initial deposit may not be doable for some. This may not be the same everywhere you are looking, but you’ll want to compare accounts to see what makes the most sense for you.

Compare all of our personal checking accounts here.

Another consideration is the minimum balance you’ll have to maintain. This will change depending on the bank, but typically you need to keep your average daily balance above a certain level to avoid a maintenance fee. This is common for checking accounts, but with an interest checking account the minimum could be higher.

There may also be requirements to get the interest rate advertised. For example, Southern Bank has two requirements for the Southern Advantage checking account to earn the higher APY quoted:

  1. Make at least 20 debit card purchases a month 1
  2. Have at least one recurring direct deposit, automatic payment (ACH), or auto debit.

If you are unable to meet those requirements, then you’ll still earn interest but at a lower rate. You’ll want to look at the requirements before setting up an interest-bearing account to make sure you can get the rate they advertise.

Get started with a Keeps Savings + Spending Account
Get started with a Keeps Savings + Spending Account

Interest-Bearing Checking vs. Savings

Interest checking accounts share the feature of earning interest with savings accounts. When choosing between the two it really comes down to how you’ll use it.

While an interest checking account can grow your money and give easy access to it, there are some limits. For instance, these types of accounts sometimes require you to use your debit card a certain number of times each month in order to get the higher advertised rate. Each bank will have different requirements, so you’ll need to pay attention to what they are.

Interest rates may also be capped with an interest checking account. This means that the interest rate will only apply to funds up to a certain amount. After that amount, the interest rate will often be lower. Savings accounts, on the other hand, are not made for spending. In fact, they usually have limits on how often you can take money out, making them a great place for something like a college or emergency fund. Savings accounts are made to build over a longer period of time. Unlike interest checking accounts, they don’t usually come with a cap on the interest rate.

High yield savings accounts, which are a type of savings account that typically pays 20 to 25 times the national average 2, can give you the opportunity to grow your money faster with a better rate. Most high yield savings accounts are offered by online banks.

Here’s a list of pros and cons to help understand the differences between interest-bearing checking accounts and savings accounts:

Interest-bearing Checking Accounts

Pros:

  1. Easy access to funds
  2. Competitive interest rates, sometimes higher than savings accounts

Cons:

  1. May have requirements to achieve desired higher APY (ex. Using a debit card a certain number of times.)
  2. Rate may be capped at a certain balance


Savings Accounts

Pros:

  1. Less attention required as money grows over time
  2. Little to no requirements to achieve rate
  3. Rate is typically not capped at a certain balance

Cons:

  1. Limited access to funds (Often accounts are limited to six withdrawals per month before a fee is assessed.)
  2. May require a higher minimum deposit to open


CD’s and Money Market Savings Accounts

If you’re looking for other accounts that will accrue interest, Certificates of Deposit (CD’s) and Money Market Savings Accounts are a good place to look as well.

Certificates of Deposit or CD’s are a type of account that is used to grow money over a set period of time. You often get higher interest rates on CD’s compared to savings accounts for the tradeoff of not being able to access the funds. They are a great option for people looking for a guaranteed rate over the life of the account, since you most often get a fixed rate. This gives you peace of mind about the growth of your money even if rates drop. However, it can be risky taking out longer CD’s since rates could go up, leaving you stuck with a lower rate. The length of time you can open a CD ranges anywhere from a few months to 5 years or more.

A Money Market account is much like a savings account with a little more accessibility to the funds through check writing and the option of a debit card. Rates tend to be a little better and are typically tiered based on the amount you have in the account. For the most part you will still be limited on the number of transactions you can have. Minimums tend to be higher for opening Money Market accounts, so while there is added accessibility to funds compared to most savings accounts, you may need more money in the beginning to open one.

Opening a bank account? Here’s everything you’ll need to get it started.

Disclosures & References:

1 Southern Advantage: Qualifying transactions must post to and settle account during monthly qualification cycle. Transactions may take one or more banking days from the date that the transaction was made to post and settle the account. “Monthly Qualification Cycle” means a period beginning the first day of the month and ending the last day of the month; which is the same date period as your statement cycle. Accounts are available to Missouri, Arkansas and Illinois residents and for personal use only. Effective June 1, 2021.

2 Karl, Sabrina, What Is a High-Yield Savings Account?, Investopedia.com, Nov. 3, 2021,
https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp