Guide to Interest-Bearing Checking Accounts

Q: What is an interest bearing checking account?

An interest-bearing checking account is a type of checking account that offers returns, in contrast to regular checking accounts, which typically don't charge interest. It may or may not offer a larger interest rate than a money market account or savings account .

Q: What is the highest interest rate on an interest checking account?

The highest APY nationwide checking account seems to come from La Capitol Federal Credit Union. As of March 2023, its Choice Checking account offered a 4.25% APY on up to $3,000 and a 2.67% APY on balances between $3,000 to $10,000. Balances above $10,000 earn a 0.10% APY.

Nancy BilyeauUpdated April 6, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

An interest-bearing checking account sounds just like what it is — a checking account that pays interest on the money held in that account. Also called "high-yield checking accounts" or "rewards checking accounts," they often offer above-average interest payments. Consumers who stash a lot of money in their checking accounts may want to opt for an interest-bearing checking account.But are checking accounts that earn interest the right option for you? This article will look at how interest-earning checking accounts function, the highest interest rate to be expected on an interest checking account, and the pros and cons of this choice.

Do Checking Accounts Earn Interest?

Most traditional checking accounts don't earn interest because they gear themselves toward short-term deposits. However, interest-bearing checking accounts build interest on account balances, typically averaging about 0.6% annual percentage yield (APY). APY refers to the amount of money you earn in a bank account over one year, including compound interest, or interest that builds on interest.

How Interest-Earning Checking Accounts Function

Interest-bearing checking accounts work similarly to checking accounts that don't earn interest. You can deposit and withdraw money through a bank or credit union and typically access your money through debit cards, paper checks, automatic electronic payments, and online bill pay.You typically earn monthly interest on the balance of your checking account. Your financial institution (bank or credit union) sets its own APY. The APY often depends on the amount of money in your account. Some financial institutions offer a higher APY for larger balances. Recommended: What Are Premium Bank Accounts?

What Is the Highest Interest Rate on an Interest Checking Account?

The highest APY nationwide checking account comes from La Capitol Federal Credit Union. Its Choice Checking account offers a 4.25% APY on up to $3,000 and a 2.67% APY on balances between $3,000 and $10,000. The credit union requires 15 debit card transactions per month. You must pay a 0.10% APY on the entire balance for that month if you don't meet the qualifications for the amount in your account.You won't have to pay a fee if you meet the monthly debit transaction requirement or keep your average daily balance above $1,000 for the month. Otherwise, you'll pay an $8 low balance fee.

Pros and Cons of Interest-Bearing Checking Accounts

It's worth considering the pros and cons of interest-bearing checking accounts before you decide whether they make sense for your individual needs and goals.

Pros

The benefits of an interest-bearing checking account include the following:

Earn interest on the account balance: You can obtain money from the interest on the account balance, which regular checking accounts don't provide.
Fund accessibility: You can access your funds in various ways — through debit cards, checks, electronic payments, and online bill pay. You'll also benefit from other perks, such as online banking, banking apps, automatic payroll and more.
Backed by your institution: Banks and credit unions offer backing by the Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA), respectively. NCUA and FDIC insurance covers up to $250,000 for each account owner for each type of account.
Low fees: You likely won't pay hefty maintenance fees on your account and some financial institutions will not charge any fees.

Cons

It's worth considering the downsides of this type of account:

Balance requirements: Interest-bearing checking accounts often require you to meet a minimum balance. For example, you may need to keep at least $1,000 in the account to avoid a monthly maintenance fee.
May not have a competitive interest rate: Not all interest-bearing checking accounts offer a high interest rate. Some interest-bearing checking accounts might offer a lower interest rate than a high-yield savings account. Note that you may not earn any interest if you fail to manage your account.

May have caps: Some financial institutions limit the amount of money that can earn a competitive interest rate.

Pros of Interest-Bearing Checking Accounts	Cons of Interest-Bearing Checking Accounts
Can earn interest on the account balance	May need to maintain initial and ongoing balance requirements
Can access funds	May not offer a competitive interest rate
Backed by your financial institution	Possible caps
Low fees	Fees may hinder your returns

Interest-Bearing Checking Accounts vs Regular Checking Accounts

The biggest difference between an interest-bearing checking account and a regular checking account is that it earns interest. An interest-bearing checking account may also require you to maintain a higher balance to avoid a monthly fee.Recommended: Money Market vs Checking Account

Interest Checking Accounts vs Savings Accounts

Some people are motivated to open savings accounts to stash money for the long term for a specific goal, such as for an emergency. Savings accounts typically offer very low interest rates — the FDIC announced a 0.24% APY on savings accounts. A savings account typically gives you less access to your account. For example, you can typically use a debit card on a checking account but not a savings account.Why might you choose an interest checking account over opening a savings account — or vice versa? A high-yield savings account allows you to earn more interest than you would earn with a traditional savings account. You may earn less interest with a high-yield checking account compared to a high-yield savings account. On the other hand, an interest checking account often comes with minimum balance or transaction requirements. It's a good idea to compare each account side by side (and consider your goals) before you decide on the right option for your needs.Recommended: How much does the average person have in savings?

Interest Checking Account Eligibility

You may need a photo ID and give the financial institution your Social Security number or taxpayer identification number to qualify to open an interest checking account. You must also fulfill membership requirements to get an interest checking account from a credit union.Check on the initial deposit requirement, whether you need to fulfill a daily balance requirement, and the interest qualifications. After applying for an account and getting approved, you can deposit money through direct deposit or transfer from another bank.

Finding Higher Interest-Bearing Checking Accounts

It's a good idea to shop around. Check with your current financial institution; learn more about the APYs at other credit unions or online banks. You don't have to stick with your existing financial institution, because they might not give you a high interest rate option.

The Takeaway

There's a lot to consider with your money, from zero-based budgeting to borrowing money to finding the right savings and checking accounts to park your money. Now that you know the answer to "do checking accounts earn interest?" — do they fit your needs? Interest earning checking accounts make sense if you keep a high account balance regularly. If you think you might dip below the balance requirements or may not have the right amount to fit within the capped limits, an interest checking account may not fit your particular needs. It's worth exploring the benefits of a savings or checking account. Lantern by SoFi offers an online banking marketplace and can help you find the right interest savings accounts based on interest rate, fees, and balance minimums.

Frequently Asked Questions

What is an interest bearing checking account?

What are the disadvantages of interest bearing checking accounts?

What is the highest interest rate on an interest checking account?

Photo credit: iStock/RapidEye

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About the Author

Nancy Bilyeau

Nancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for Lantern. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.

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