Interest-Bearing Checking Accounts: Can they Compete with High-Yield Savings Accounts?

A reader emailed me last week after reading my article on the current high-yield savings account rates I had researched in order to figure out where to move our emergency fund. He wanted to make sure I knew about a 2% APY interest rate on a checking account here in Texas. I did a double-take when first reading 2% as well, especially since it had to do with checking accounts.

The idea of receiving interest on money I am the temporary custodian for until I hand it over to its rightful owners—our mortgage company, our water company, Netflix, our cell phone companies, etc. — definitely intrigues me. Unfortunately, even after my uncle teasingly bragged to me about the interest he was earning on his checking account several years ago I still have not looked into the extra interest I could be earning. Well, it’s a new year and a good time to look into new opportunities.

Outcompete Your Savings Account

Here’s the thing: interest-bearing checking accounts typically offer a fraction of the interest yields of savings accounts or Certificates of Deposit. But now that savings account rates are so pathetically low, interest-bearing checking accounts can actually outcompete a savings account. A look at the current rewards checking market shows that current interest rates range from 0.01% all the way to 3.82%. Even though these accounts are not meant to be used as a vehicle for savings—and banks have plenty of rules in place to ensure that they are not fully taken advantage of—there is reason to park as much money as is allowed in them.

Rules, Rules, Rules

Interest-bearing checking accounts are actually called Negotiable Order of Withdrawal (NOW) accounts, as it’s illegal for a Federal Reserve member bank to pay interest on a checking account (they are also referred to as rewards checking accounts). And the stiff rules do not end there. Rules can include setting up direct deposit, mandatory online bill payment, maximum and minimum contributions, and check card or debit card activity.

An Example

Brick and mortar banks are unlikely to offer an interest-bearing checking account worth much (a quick search shows Wells Fargo is currently offering 0.01%, and Bank of America is currently offering between 0.01%-0.03% for their rewards checking accounts). However, just like online savings accounts, online checking accounts are offering more. I found one online checking account that is currently offering an incredible 3.51% APY on balances of $0-$15,000 (the reward rate over $15,000 is only 0.51%). There is a minimum opening balance of $100, and you need to do the following: make 12 debit transactions per month, set up direct deposit or authorize one electronic/ACH payment, and enroll to receive electronic statements. You could essentially stash up to $15,000 in emergency savings in this account while also using it as a checking account. Let’s say you have the $15,000 in this account. This means that each month you will be earning approximately $43.87 (versus the $9.33 you would earn at an online savings account with a 0.747% interest rate). What a difference!

Now that I know about interest-bearing checking accounts I think I am going to shop around for one. I used to pay off our bills as quickly as possible to check them off the list as well as so that I could stay on top of our checking account balance. However, should we switch to an interest-bearing account my new motivation would be to delay paying bills until the day they are due (or the day before for good measure) in order to accrue as much interest as possible on money that would otherwise hold no monetary benefits for us.

Do you have an interest-bearing checking account? How has this changed the way you pay bills?

3 comments… add one

  • Laura

    Yes, I have an interest-bearing checking account with Lake Michigan Credit Union (anyone can join by making a $5 donation – I live in southern CA!). I opened this account late last year and within the first month the $5 donation paid off in extra interest I received. It is a similar set-up to what you described earlier (10 debit transactions per month, direct deposit, log in 4 times to review your account per month, and receive eStatements) and provides 3% on up to $15,000.

    Any money over $15,000 at the end of the month, I put into a regular savings account earning less interest, but at least it earns something. Based on current rates, I am received six-fold of my interest on those $15,000 and since it is my emergency fund, it is good to see that grow.

    • FruGal

      Nice interest rate! It is a lot of rules, but if you truly treat it like a checking account that most of it takes care of itself. Thank you for sharing with us.

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