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What is an Interest-Bearing Checking Account? & 5 Benefits

Happy couple on their tablet device applying for an interest-bearing checking account.

One of the easiest ways to put your money to work for you is by depositing it in an interest-bearing account. While many accounts earn only a small amount of interest, those small amounts can add up over time. Most of us are familiar with earning interest from a savings account, but there are other options as well, including an interest-bearing checking account. If you are looking to learn more, here are five benefits to consider.

How Does an Interest-Bearing Account Work?

Interest-bearing accounts work on the simple premise of rewarding account holders by paying interest on the money in the account. Said another way, credit unions and banks offer interest or dividend-bearing accounts to provide their clients with an incentive to keep their money where it is instead of moving it to another institution.

In most cases, the interest accrues daily and is added to the bank account monthly. The account holder can see the interest on their monthly account statement or mobile app.

Types of Interest-Bearing Accounts

The most common type of interest-bearing account is a traditional savings account. Interest is provided as a savings incentive. However, there are other types of interest-bearing accounts to consider:

  • High-yield savings account. High-interest savings accounts often have minimum balance requirements. The interest rate increases as the account holder meets balance requirements and has a maximum interest rate for the highest balances.
  • Money market account. Money market accounts offer higher interest rates than savings accounts. These accounts combine the interest-earning ability of a high-interest savings account with the functionality of a checking account.
  • Rewards checking account. Checking accounts have traditionally been non-interest-bearing accounts, but some financial institutions offer interest-bearing checking accounts. The interest rates may be quite low but still offer the opportunity to earn money on your deposits.

Some people may choose to have both savings and checking accounts that pay interest to maximize their savings. It’s important to note that none of the accounts listed above can offer the same earning potential as an investment account, but they do allow people to have ready access to their money while still earning a return on their deposits.

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What is the Difference Between Interest and Dividends?

Two terms that may sometimes be connected with checking accounts are interest and dividends. While both offer the opportunity to earn interest on your deposits, there are some key differences that you should know before opening an account.

Interest refers to a payment (or a charge, in the case of a loan) that accrues when one party allows another to use their money. In the case of a checking account, a financial institution pays interest to the account holder in return for the use of their money. The reverse is true in lending because the financial institution charges interest in return for allowing the borrower to use the institution’s money.

A dividend works in much the same way but it is paid out to a shareholder in a company. The reason that credit unions pay dividends and not interest is that every member is a part-owner of the credit union.

In terms of accrual, interest and dividends work in the same way. They are accrued daily and paid monthly, quarterly, or at maturity. The only other difference is that it is common for credit unions to pay dividends that are higher than typical interest rates because they are based on ownership.

Five Benefits of Opening an Interest-Bearing Checking Account

By now, you may be wondering what the benefits of opening an interest-bearing checking account are. Here are five to consider.

#1: You’ll Earn Money on Your Deposits

The first benefit of choosing an interest-bearing checking account over a traditional checking account is that you’ll earn money on your deposits. Many people in the United States have their paychecks directly deposited into their checking accounts. As your balance grows, so will your earnings.

Since most traditional checking accounts do not pay interest, interest-bearing checking accounts are appealing. You might not earn a high return on your account balance, but you’ll still be getting money each month that you wouldn’t otherwise, provided you meet the account balance and activity requirements of your financial institution.

#2: Your Money Remains Liquid and Accessible

There are some types of interest-bearing accounts where the account holder doesn’t have easy access to their money. There may be minimum balance requirements or the money simply may not be accessible in the same way money in a checking account would be.

When you choose a checking account that pays dividends or interest, then you have the same level of access to your money you would with any checking account. You can make deposits, use an debit card, write checks, and do anything else you might need to do with the funds you have in the account.

#3: You Will Pay Low (or No) Fees

Traditional checking accounts may sometimes charge an annual or monthly fee to account holders. While there may be a fee with an interest or dividend-bearing checking account, the fees are typically very low and in some cases, there may be no fees at all.

As an example, Leaders Credit Union offers a rewards checking account that pays generous dividends with no monthly fees. While the lack of a fee might not seem like much, your savings will add to your balance and result in higher dividend payments for you as one of our valued members.

#4: Your Money is Secure

Deposits in checking accounts of all kinds are typically backed by insurance and thus are more secure than deposits in investment accounts. As a credit union, Leaders’ accounts up to $250,000 per depositor are backed by the National Credit Union Association and the full faith and security of the United States government.

The same is true of checking accounts at banks, which are backed by the Federal Deposit Insurance Corporation up to $250,000 per depositor. In other words, you don’t need to worry because the money in your interest-bearing checking account is protected.

#5: Interest-Bearing Checking Accounts May Come with Special Features

Interest or dividend-bearing checking accounts come with many of the same special features you can find with traditional checking accounts. Some of the features you may find include the following:

  • Free ATM or debit card with unlimited withdrawals
  • Reimbursement of some foreign ATM fees
  • Unlimited deposits and withdrawals
  • Overdraft protection
  • Fraud protection
  • No minimum balance requirement

Features will vary depending on your financial institution, but you can see that choosing an account that pays dividends or interest won’t impede your ability to use your money or take advantage of checking account features.

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Are There Drawbacks to Opening an Interest-Bearing Checking Account?

Considering that the primary difference between a traditional non-interest-bearing checking account and an interest-bearing account is the ability to earn money on your deposits, you might be wondering if there are any drawbacks you should know about.

Drawbacks might be a strong word to use because what might be an issue for some people may not be a problem for others. Here are a few things to consider when choosing an interest-bearing checking account.

Minimum Deposits or Balances

The first thing to consider is whether a credit union or bank requires a minimum deposit to open an account. While some do not, others do. You’ll need to read the fine print and ask questions to be sure you understand the requirements.

Leaders Credit Union offers our Champion Rewards checking account with no minimum balance or minimum deposit requirements. It’s our mission to help every one of our members achieve their financial goals, and part of that is making our dividend-bearing checking account as accessible as possible.

Account Requirements and Limitations

The other thing to keep in mind is whether an interest-bearing account has other requirements and limitations. Many financial institutions impose certain limitations on interest-bearing checking accounts.

At Leaders Credit Union, we have a few requirements that apply to our Champion Rewards account:

  • Account holders must have at least one direct deposit per month.
  • Account holders must complete a minimum of 15 transactions with their MasterCard® debit card each month.
  • Account holders must enroll in eStatements.

We have found that these requirements are not a hardship for our members, since most of them are enrolled in direct deposit with their employers and use their debit cards regularly.

Start Earning Dividends on Your Checking Account Today with Leaders

Choosing an interest or high-yield checking account is an easy way to add to your deposits. Provided you can meet the requirements to open an account that pays interest or dividends, you can take advantage of the five benefits listed here and put your money to work for you.

If you're considering switching your primary checking account, we’ve put together a helpful guide that walks you through the steps. Download for free today!