Does a Checking Account Earn Interest?

by Maria Espinosa

A traditional checking account is often seen as a staple in day-to-day personal finance, facilitating debit card purchases, ATM withdrawals, and direct deposits. Yet, many account holders may not realize that certain types of checking accounts, specifically interest-bearing checking accounts, offer the potential to earn interest (or dividends) on the account balance. Financial institutions, including banks and credit unions, provide various financial products, with some designed to accrue earnings over time.

Banks typically provide interest on checking accounts based on the average daily balance, with the annual percentage yield (APY) reflecting the compounding interest over a year. Credit unions, on the other hand, distribute dividends to members as a return on an equity (ownership) investment. Although earnings on checking accounts are generally lower than those in high-yield savings accounts or money market accounts, they can contribute significantly to your financial growth, especially if you maintain a large balance in your checking account.

In today's financial world, making your money work for you is more important than ever, especially when it comes to everyday banking. This guide provides a comprehensive look at the nuances of checking accounts, particularly those that accrue earnings through interest or dividends, and the factors influencing the rates.

Interest Rates Unveiled: How Checking Account Interest Works

While both banks and credit unions offer checking accounts with the potential to earn interest or dividends, there are some key differences:

• Banks pay interest, which is determined by the average daily balance in your account and expressed as APY. The APY indicates the effective annual rate of return, incorporating the impact of compounding interest through the year. Some banks might offer promotional rates or higher rates for specific accounts to attract customers to open new accounts.
• Credit unions distribute dividends that reflect their profitability, functioning as cooperatives by sharing profits among members. This means that the amount earned depends on the overall profitability as well. The account then pays dividends on the balance, typically monthly. Moreover, credit unions may provide tiered dividends based on account balance, rewarding members who have a deeper relationship.

Factors Affecting Interest Rates on Checking Accounts

One of the primary factors is the overall interest rate environment set by the Federal Reserve. Changes in the federal funds rate can impact the rates offered by financial institutions, particularly banks, on various products including checking accounts.

Institutional policies or competition are other factors influencing the rates. Banks may offer promotional or high interest rates for specific account types to attract new customers or to encourage existing ones to keep more money in their accounts. Credit unions, which aim to serve their members, often offer dividends that reflect their profitability and the cooperative principle of sharing profits.

Additionally, the interest or dividends earned often depends on your account balance and/or the type of checking account. Some specialized checking accounts, such as the Premier Checking or High Rate Checking at Logix may earn dividends each day your balance is over the minimum deposit requirement.

How to Find the Best Checking Account for Earning Interest

Selecting the perfect checking account requires careful consideration before taking the plunge. Start by comparing the interest rates offered at banks and the dividends at credit unions to see where you can get the most competitive returns. Keep an eye out for minimum balance requirements or monthly service fees, as these can quickly eat into any earnings. Ideally, you want an account that suits your spending habits without burdening you with hefty fees.

It's also important to evaluate any account features and benefits that matter most to you, such as reliable debit card transactions, user-friendly online banking, or the availability of a mobile banking app for added convenience.

Finally, choosing a bank or credit union with a strong reputation and excellent service is crucial. While online institutions often offer higher rates due to lower operational costs, having easy access to support when you need it is invaluable. Remember to opt for a financial institution that not only provides a good rate, but also peace of mind with protections like the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions.

Pros and Cons of Interest-Earning Checking Accounts

There are several advantages and perks of choosing a checking account that can earn interest or dividends:

• Earning Potential: Both interest/dividends offer a way to grow your funds, even if it's a modest amount. This can be beneficial for individuals who maintain a higher balance in their checking account.
• Convenience: Access and manage your finances with ease through direct deposit, pay your bills, or make purchases without sacrificing the opportunity to grow your balance. Some checking accounts even offer early payday with direct deposit* which allows access to your paycheck funds up to two days faster.
• Freebies: Some of these accounts may offer additional features and benefits, such as free checks, overdraft protection, ATM fee reimbursement or rewards programs.
• Building Good Habits: By getting accustomed to earning interest on your checking account balance, you may be motivated to explore other savings and investment options to further grow your wealth.

While these types of checking accounts offer several benefits, they are not without their downsides:

• Rates: The rates offered on checking accounts are generally lower compared to savings accounts or certificate accounts. If you're solely looking to maximize your earnings, you might consider exploring alternative investment avenues.
• Requirements: Be mindful of monthly fees and/or higher minimum balance requirements on those interest-earning checking accounts. It's important to carefully review the account terms and conditions to ensure they align with your financial situation and goals.
• Tax Implications: Interest or dividends earned on these accounts is considered taxable income. This means you'll need to report any earnings on your tax returns and may be subject to paying taxes on that income. It's essential to consider the tax implications and consult with a tax professional if needed.

Understanding the differences between checking accounts at banks and those offered by credit unions sheds light on making an informed choice, not just in terms of the financial products and returns, but also in aligning with your financial aspirations. By thoroughly evaluating these aspects, you can choose a checking account that not only helps you manage your daily financial transactions, but also contributes to your overall financial growth.

Ready to open your account? Apply online or visit your nearest branch to open your account in person.