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How Does an Interest-Bearing Checking Account Work?

Did you know an interest-bearing checking account exists? We answer how an interest-bearing checking account works, plus if it can compete with savings accounts.

white desk with wooden calculator, text overlay "how does a interest bearing checking account work?"

A reader emailed me 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 reward 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 the 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, our savings, etc. – definitely intrigues me.

My Uncle even teased me several years ago by bragging about all the interest he was earning on his checking account…and that STILL didn't make me look into the extra interest I could be earning.

Well, the time has come to look into new money-earning opportunities.

Specifically, the low-risk kind (interest-bearing checking accounts are generally insured up to $250,000 per depositor by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA), just like savings accounts – definitely check to make sure this is the case before moving forward with a bank).

How to Save Money by Out-competing Your Savings Account

Here’s the thing: an interest-bearing checking account typically offers a fraction of the interest yields of savings accounts or Certificates of Deposit.

But now that savings account rates are so pathetically low (at the time of writing this article), interest-bearing checking accounts can actually out-compete a savings account.

And they're a low-risk way to earn money off of your money! I love that.

A look at the current rewards/interest-bearing checking account market shows that current interest rates range from 0.10% all the way to 5.00%.

Pssst: I'm earning 2.14% APY on my savings account at the moment…and that's a leading market rate.

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.

Are Rewards Checking Accounts Worth it? 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.

You may also see them referred to as rewards checking accounts.

What you want to watch out for when determining if rewards checking accounts are worth it are the fees to use one, the penalties for not meeting their rules on a consistent basis, and if the interest you'll earn is “worth it” to you.

Rules can include setting up direct deposit, mandatory online bill payment, maximum and minimum contributions, and completing specific check card or debit card activity.

Figure Out if the Interest is “Worth it”: Interest Bearing Checking Account Calculator

Another way to figure out whether or not a rewards checking account is worth it is to find out if you'll be earning simple or compound interest.

Hint: you want to be earning compound interest that is calculated and compounded daily (it can also be compounded monthly, but you'll earn more if it's compounded daily, so be sure to ask!).

Always make sure the amount of interest you earn is more than any fees you'll pay. But more than that? You need to make sure you won't earn the same amount in interest from a savings account after you take any fees into consideration.

Here are Interest Bearing Checking Account Calculators:

Let's take a look at one particular account I found, as an example of what you need to meet in order to get the “free money”.

Rules for An Example Interest-Bearing Checking Account

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 2.51% APY on balances of $0-$10,000 (the reward rate over $10,000 is only 0.10%).

Here's a breakdown example of the rules involved:

  • Minimum Opening Balance: There is a minimum opening balance of $100.
  • Debit Transaction Rules: You need to make 12 debit transactions per month in order to earn that interest rate.
  • Direct Deposit Rules: You need to set up direct deposit or authorize one electronic/ACH payment.
  • Paperless Rule: You must enroll to receive electronic statements. You must also access online banking.

A Strategy for Using Interest-Bearing Checking Accounts

If you open one of these accounts to reap the extra earnings on the money you'll be paying out to bills anyway, then you need to have a strategy to steer clear of penalties and to earn that interest rate each month.

Here's a strategy for the account mentioned above, as an example:

You could essentially stash something like $7,000-$8,000 from your savings account in this account, on top of the amount you need to pay your bills each month. So you'd still be using the account as a checking account, with your paychecks automatically deposited into it. With an approximate balance at any given time of $9,000 (this will fluctuate, of course, with your bill payments and paychecks), then each month you'd earn approximately $18.84 (versus the $14.26 you would earn at an online savings account with a 1.90% APY interest rate). That's about $4.58/month, or an extra $54.96/year.

If we were to get an interest-bearing checking account, we would change our bill-paying strategy as well. With our current, non-interest earning checking account, I pay off our bills as quickly as possible to check them off the list as well as so that I can stay on top of our checking account balance.

However, should we switch to a rewards checking 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?

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Amanda L Grossman

Personal Finance Writer and CEO at Frugal Confessions, LLC
Amanda L. Grossman is a writer and Certified Financial Education Instructor, Plutus Foundation Grant Recipient, and founder of Frugal Confessions. Over the last 13 years, her money work has helped people with how to save money and how to manage money. She's been featured in the Wall Street Journal, Kiplinger, Washington Post, U.S. News & World Report, Business Insider, LifeHacker, Real Simple Magazine, Woman's World, Woman's Day, ABC 13 Houston, Keybank, and more. Read more here or on LinkedIn.


Monday 14th of January 2013

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.


Tuesday 15th of January 2013

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.