Yes, some checking accounts earn interest, but the rate is usually very low

A standard checking account at most banks does not earn interest. You deposit money, you write checks or use your debit card, and the bank keeps any interest your balance would have generated. But interest-bearing checking accounts do exist — they pay you a small percentage of your balance each month or quarter. The catch is that the interest rate is almost always under 1 percent per year, and many accounts charge monthly fees that eat into whatever you earn.

The banks that offer the highest rates on checking accounts are usually online banks and credit unions, not brick-and-mortar branches. Online banks have lower overhead costs, so they can afford to pass some of that savings to you. Credit unions, which are member-owned rather than shareholder-owned, sometimes prioritize member returns over profit. Even so, you will see rates ranging from 0.01 percent to around 2 percent annually, depending on the institution and the account type.

Whether an interest-bearing checking account makes sense for you depends on how much money you keep in it and what fees come attached. If you maintain a $5,000 balance in an account earning 0.5 percent per year, you will earn about $25 annually — before any monthly maintenance fees. If that account charges $12 a month to keep open, you have already lost money.

Key Takeaways

  • Most traditional banks offer checking accounts with zero interest, while online banks and credit unions are more likely to pay rates between 0.01 and 2 percent annually.
  • The interest you earn on a checking account is usually small enough that monthly fees can wipe out your gains entirely.
  • Some interest-bearing checking accounts require you to meet conditions like a minimum balance, a certain number of debit card transactions per month, or direct deposit to earn the advertised rate.
  • Savings accounts and money market accounts typically earn higher interest than checking accounts, but they limit how often you can withdraw money.
  • The interest rate on any account can change at any time, so the rate you see today may not be the rate you earn next month.

How banks calculate and pay interest on checking accounts

Interest on a checking account is calculated based on your average daily balance — the total amount in your account divided by the number of days in the month. If you have $1,000 in the account for 15 days and $2,000 for the other 15 days, your average daily balance is $1,500. The bank then applies the annual interest rate to that average and divides by 12 to get your monthly interest payment.

Most banks pay interest monthly, though some pay quarterly. The payment shows up as a credit to your account — you will see it listed as a deposit in your transaction history. The amount is usually small enough that you might not notice it unless you are looking for it. A $1,500 average balance at 0.5 percent annual interest earns about 63 cents per month.

Interest is taxable income. At the end of the year, the bank will send you a 1099-INT form if you earned $10 or more in interest across all your accounts at that bank. You report this on your tax return, even though the amount is often tiny.

Conditions that come with interest-bearing checking accounts

Not all interest-bearing checking accounts pay interest on every dollar you deposit. Many have tiered rates, meaning the interest rate changes depending on how much money you have in the account. A bank might pay 1.5 percent on the first $10,000 and 0.1 percent on anything above that. Others pay a higher rate only if you meet specific requirements.

Common conditions include a minimum balance — often $500 to $2,500 — that you must maintain to earn any interest at all. Some accounts require a certain number of debit card transactions per month, like 10 or 15 swipes. Others require direct deposit of your paycheck. If you do not meet the condition, the interest rate drops to zero or the account converts to a non-interest-bearing account.

Monthly fees are another factor. Some interest-bearing checking accounts charge $5 to $15 per month to keep open, though many waive the fee if you maintain a minimum balance or set up direct deposit. Before opening an account, calculate whether the interest you will earn actually exceeds the fees you will pay.

Online banks versus credit unions versus traditional banks

Online banks typically offer the highest checking account interest rates because they do not operate physical branches. Banks like Ally, Charles Schwab, and Marcus by Goldman Sachs have published rates as high as 2 percent on checking accounts in recent years, though these rates change frequently and are not may provide to stay that high. Online banks also tend to have lower or no monthly fees.

Credit unions often offer competitive rates on checking accounts, sometimes higher than online banks. However, credit unions are smaller and membership is usually restricted — you might have to work for a specific employer, live in a certain area, or belong to a particular organization to join. If you are already a credit union member, it is worth asking whether they offer an interest-bearing checking account.

Traditional brick-and-mortar banks — the ones with physical locations in your town — almost never offer interest on checking accounts. Their business model relies on the spread between what they pay depositors and what they charge borrowers. They make money by keeping your interest, so they have little incentive to pay you any.

When a savings account or money market account makes more sense

If your goal is to earn interest on money you are not spending right away, a savings account or money market account will almost always earn more than a checking account. Savings accounts at online banks currently earn between 4 and 5 percent annually, compared to 0.5 to 2 percent on checking accounts. Money market accounts offer similar rates and often come with a debit card for limited withdrawals.

The tradeoff is access. Checking accounts are designed for frequent transactions — you can withdraw money as often as you want. Savings and money market accounts have withdrawal limits, usually six per month (though this rule is enforced less strictly now than it once was). If you need to access your money regularly, a checking account is the right tool even if it earns less interest.

A practical approach is to keep your everyday spending money in a checking account and move extra money to a high-yield savings account. That way you earn a meaningful rate on the money you are not using immediately, while keeping a checking account for bills and purchases.

How interest rates on checking accounts change over time

Interest rates on checking accounts are not fixed. Banks change them based on what the Federal Reserve does with its benchmark interest rate. When the Fed raises rates, banks have more incentive to pay depositors more to keep their money. When the Fed cuts rates, banks lower what they pay you.

The rate you see advertised today might be different next month. Some banks lock in a rate for a promotional period — say, 2 percent for the first three months — then drop it to a lower rate afterward. Always read the fine print to see whether the rate is may provide or promotional, and how long it lasts.

If you open an account at an online bank because of a high advertised rate, check back periodically to see whether that rate is still competitive. If it drops significantly, you can move your money to a different bank. There is no penalty for closing a checking account and opening one elsewhere.

Frequently Asked Questions

Do I have to pay taxes on the interest I earn from a checking account?

Yes. Interest from a checking account is taxable income. If you earn $10 or more in interest from all accounts at a single bank during the year, the bank sends you a 1099-INT form. You report this on your tax return. The amount is usually small, but it still counts as income.

What is the highest interest rate I can find on a checking account right now?

Online banks and some credit unions currently offer rates between 1 and 2.5 percent, though these rates change frequently and are not may provide. Check the websites of online banks like Ally, Charles Schwab, and Marcus, or ask your credit union what they offer. Rates vary based on the account type and any conditions attached.

Can I lose money if I open an interest-bearing checking account?

You will not lose the money you deposit, but you can lose money if monthly fees exceed the interest you earn. Before opening an account, calculate the annual interest on your expected balance and subtract any monthly fees. If fees are higher than interest, the account costs you money.

Should I move my checking account to earn interest?

Only if the interest rate is high enough to offset any fees and the account meets your needs for frequent transactions. If you keep a small balance or need access to your money constantly, the interest earned will be minimal. A high-yield savings account for money you are not spending immediately is often a better choice.

What happens to my interest rate if the bank changes it?

The bank can change the rate at any time without your permission. You will usually receive notice before the change takes effect. If the new rate is much lower, you can close the account and move your money to a different bank with no penalty.