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Checking accounts are essential tools for managing your day-to-day finances, from making everyday purchases to paying bills and depositing funds. While standard checking accounts typically don’t earn interest, high-yield checking accounts do, offering a unique opportunity to grow your money. In this blog, we’ll explore what high-yield checking accounts are, how they work, their pros and cons, and how to choose the right one for your needs. We’ll also discuss some alternatives to high-yield checking accounts.
A high-yield checking account functions like a standard interest-earning checking account but offers a higher annual percentage yield (APY). While interest rates can vary, you can currently find high-yield checking accounts with APYs of 3% or more. By comparison, a standard interest checking account earned an average of 0.07% APY in November 2023, according to the Federal Deposit Insurance Corp. (FDIC).
High-yield checking accounts and high-yield savings accounts both offer higher APYs than standard checking and savings accounts. However, there are some key differences:
You can use a high-yield checking account as you would any other checking account. Deposit and withdraw funds, pay bills, transfer money to and from linked bank accounts, and more. The money in your account earns interest, but the amount of interest isn’t always straightforward.
A high-yield checking account’s APY may vary depending on whether you meet specific criteria. For example, to earn the highest interest rate, you might need to:
There may also be different APY tiers based on your account balance. For instance, a balance up to $5,000 might earn 4% APY, while any part of your balance above that amount earns a lower APY.
Before opening a high-yield checking account, consider the benefits and downsides.
It could be worthwhile to open a high-yield checking account if you usually keep a lot of money in your checking account, can easily meet the requirements to earn the highest APY, and don’t mind switching your account to a new bank. In this situation, a high-yield checking account earns interest on money that would otherwise sit idle.
However, a high-yield checking account probably doesn’t make sense if you’ll struggle to meet the bank’s criteria for the highest interest rate. For example, a balance that frequently dips below the account’s required minimum level could trigger bank fees that outweigh your interest earnings.
APY isn’t the only factor to consider when choosing a checking account. Features such as ATM access, branch locations, convenient mobile banking apps, bank services, and fees could make a checking account earning little or no interest a better bet than one with the highest APY.
When shopping for a high-yield checking account, compare these features to find the right account for your needs:
Unsure about opening a high-yield checking account? Consider these options for earning interest while keeping your money liquid:
Like rewards credit cards, rewards checking accounts give perks to account holders who meet certain criteria. Some rewards checking accounts also earn interest; even if they don’t, rewards such as cash back on debit card purchases, free checking, welcome bonuses, and no ATM fees can add up. You can’t get into debt with a rewards checking account because you’re limited to the funds in your account. However, if you think you’ll be tempted to overspend to earn rewards, this may not be the right account for you.
Many banks and credit unions offer money market accounts (MMAs), a cross between a checking and savings account. Your money earns interest, but you can also write checks and may be able to use a debit card. Banks may restrict the number of checks or debit transactions per month to six, which can limit an MMA’s usefulness for day-to-day spending. These accounts typically have minimum balance requirements. The average APY on a money market account was 0.63% in November 2023.
High-yield savings accounts available from banks and credit unions earn a higher APY than traditional savings accounts or high-yield checking accounts. Currently, you can find high-yield savings accounts earning 5% or more; online banks often offer the best rates. Although you can’t pay bills and make purchases directly from a high-yield savings account, you can access your money whenever you want by transferring funds into your checking account or withdrawing cash. Banks often limit savings accounts to six free withdrawals per month.
Bank account information is not reported to credit bureaus, so your checking account doesn’t directly impact your credit score. However, failing to pay bank fees could negatively affect your credit if your account is sent to collections. Manage your checking account wisely to ensure you can pay your bills on time, which is a major factor in your credit score. You can also track your financial health by signing up for free credit monitoring from Experian to get alerted of changes in your credit report that could signal identity theft.
If you’re thinking about opening a new checking account, consider the benefits of a high-yield checking account. At O1ne Mortgage, we are committed to helping you find the best financial solutions to meet your needs. Call us at 213-732-3074 for any mortgage service needs, and let us assist you in making the most of your money.