Earning interest on money in your checking account is a terrific idea, but like any financial product, interest bearing checking accounts have both advantages and disadvantages. Understanding how much money you regularly keep in your checking account, how frequently you need to access the money or write checks will help you determine whether or not you are likely to benefit from a checking account that earns interest.
Whenever considering a new banking option, it always pays to do some research and shop around to find the best rates and lowest fees.
Disadvantages of Interest Earning Checking Accounts
The average interest earned with checking accounts in the US is under 1.5%, with many checking accounts earning .5% interest. That being said, even .5% interest is better than none, provided the checking account isn't charging you a monthly maintenance fee. A low rate of return isn't going to maximize your earnings even if you maintain a very high balance in your checking account. Unfortunately, the majority of checking accounts that earn interest also charge a monthly fee unless you maintain a minimum balance in your account. If you're unable to keep the minimum balance in the account, chances are any of the interest you may have accumulated will be absorbed by the fee you pay to have the account.
When compared to checking accounts that don't earn interest, you can find accounts that charge no penalty or monthly fees regardless of your balance – so while you won't earn interest on money you have in your checking account, you won't be losing money in monthly bank fees.
Advantages of Interest Earning Checking Accounts
There are of course situations when an interest earning checking account would be advantageous for the consumer. For example, if you are someone who always keeps a large balance in your checking account for emergencies and to always have instant availability to cash – you would never have to worry about being charged fees for not maintaining the minimum required balance.
If you take the time to compare different banks, you can find checking accounts that earn 2-4% interest, particularly if you look into online banks. Their lower overhead allows them to pass on the savings to consumers through higher interest rates.
If you do open this type of account, you can put the bulk of your money in more lucrative investments, but still earn at least nominal interest on the balance in your checking account. In this case, it’s a matter of surveying the most convenient banks in your geographical location, then deciding which one offers the most favorable terms.
If you aren't satisfied with the interest rates the checking accounts have at your financial institution, and you're uncomfortable banking with a 100% online institution in order to get higher interest rates for checking accounts, you might consider a Money Market Account – which can also serve as your checking account in many situations. Most Money Market accounts allow a limited number of checks to be written per month, and some offer ATM card access. Money market accounts average 3-4% interest.
If you tend to keep a high balance in your checking account on a regular basis because you aren't sure where else you should save the money, or you just have more cash on hand than you would likely need to access all at once - you may prefer to look into certificate of deposit products that earn a fixed interest rate and are FDIC insured instead of the interest earning checking account in order to further maximize the amount of interest you can earn on your money.