It’s always tempting to open an interest-bearing checking account. There are so many benefits to doing so: You can earn money on your money, get cash back when you shop, and avoid paying monthly maintenance fees. However, there are some things you should know before opening one. Here are a few things you need to know before committing your hard-earned money to an interest-bearing checking account.
They are for people with direct deposit
Interest-bearing checking accounts are for people who have a direct deposit. If you need to figure out a direct deposit, it’s an electronic transfer of your salary or other income into your bank account. The money goes in immediately and doesn’t sit there like other deposits.
If you don’t have any regular source of income that can be electronically transferred into the account, then this type of checking account doesn’t help you financially.
A small balance is necessary to earn interest
You can earn interest on your checking account, but you need to meet the minimum balance requirement. For example, if your bank pays 0.01% APY (annual percentage yield) on an average daily balance of $500, and you don’t maintain that balance at all times, you’ll earn nothing in interest.
On the other hand, if you maintain an average daily balance of $50,000 or more and keep the funds in a non-interest-bearing transaction account for 60 days or more (the typical length of time it takes for checks to clear), then your bank may pay as much as 0.25% APY.
According to SoFi advisors, “You will need to keep more balance in an interest checking account.”
Extra fees can erode your rewards
Next, you need to know that a checking account can have more than one fee. Some of them are required by law, but some are optional.
A monthly maintenance fee is the most common fee in checking accounts. It’s usually $10 or so, and it’s assessed if you don’t meet certain monthly balance requirements (for example: if your balance falls below $500). The best interest-bearing checking accounts don’t come with these monthly fees.
Other types of banking fees include ATM surcharges, overdraft charges and cash advance fees for using your debit card at an ATM or point-of-sale device.
An online-only account may be better than a traditional bank’s offer.
Online-only accounts often offer higher interest rates than traditional banks. That’s because online-only banks don’t have the overhead costs of maintaining a physical branch network and can pass those savings on to you.
However, not all online-only banks are created equal. Here are some things you should look for when choosing an online-only bank:
- A higher interest rate than you can get at a traditional bank.
- More flexible terms on withdrawals and deposits (such as fewer fees or no minimum balance requirement).
- Better customer service.
Interest-bearing checking accounts are a great place for people who have access to large amounts of cash and want a way to make money on it. The key is to make sure that you understand all the rules because there are plenty of them and then look for an account with low fees and other perks like credit card bonuses or ATM fee reimbursement.