Checking accounts earn little to no interest at most banks
Most checking accounts at traditional banks pay between 0.01% and 0.05% annual interest. Some pay nothing at all. A few online banks and credit unions offer checking accounts with rates between 0.50% and 2.00%, but these come with conditions—usually a minimum balance, a set number of monthly transactions, or direct deposit requirements. The difference matters only if you keep a large balance sitting in the account.
Interest on a checking account is calculated on your average daily balance. If you have $1,000 in an account earning 0.01%, you earn about $0.10 per year. At 2.00%, you earn $20 per year on the same balance. The higher-rate accounts are real, but they are not common, and the money you earn is modest unless your balance is several thousand dollars or more.
Key Takeaways
- Traditional bank checking accounts typically earn 0.01% to 0.05% interest, which amounts to pennies per year on most balances.
- Online banks and some credit unions offer checking accounts with rates between 0.50% and 2.00%, but usually require direct deposit, a minimum balance, or a certain number of debit card transactions per month.
- Savings accounts, money market accounts, and certificates of deposit (CDs) earn significantly more interest than checking accounts at the same institution.
- The interest you earn on a checking account is taxable income, and you will receive a 1099-INT form if you earn $10 or more in interest during the year.
Why checking accounts pay so little
Banks use the money in your checking account to make loans and investments. In return, they pay you interest. However, checking accounts are designed for frequent deposits and withdrawals—the money is meant to move in and out. Because banks cannot count on that money staying put, they pay very little for the privilege of using it.
Savings accounts and money market accounts, by contrast, are designed to hold money longer. Banks can lend that money out with more confidence, so they pay higher rates. A savings account at the same bank that pays 0.01% on checking might pay 4.00% to 5.00% on savings, depending on current market rates.
Interest rates also depend on what the Federal Reserve charges banks to borrow money. When the Fed's rates are high, banks pay more on deposits. When rates are low, banks pay less. The Fed raised rates significantly between 2022 and 2023, which is why some checking accounts now offer 1.00% or higher—something that was rare before.
Which checking accounts pay the most interest
Online banks and credit unions lead in checking account interest rates. Online banks like Ally, Marcus, and Discover typically offer rates between 0.50% and 2.00% on checking accounts. Credit unions sometimes offer similar or higher rates on checking accounts called share draft accounts. Traditional brick-and-mortar banks rarely compete on rate; most offer 0.01% to 0.05%.
The catch is that high-rate checking accounts usually come with strings attached. Common requirements include:
- A minimum balance of $500 to $25,000 that must stay in the account
- Direct deposit of your paycheck
- A set number of debit card transactions per month (often 10 to 15)
- No more than a certain number of withdrawals per month
- Monthly fees if you do not meet the conditions
Before opening a high-rate checking account, read the fine print. Some banks lower the rate if you do not meet the requirements, or charge a monthly fee that wipes out the interest you earn.
How much interest you will actually earn
The amount depends on your balance and the rate. Here is what different balances earn at different rates over one year:
| Balance | At 0.05% | At 0.50% | At 1.00% | At 2.00% |
|---|---|---|---|---|
| $1,000 | $0.50 | $5.00 | $10.00 | $20.00 |
| $5,000 | $2.50 | $25.00 | $50.00 | $100.00 |
| $10,000 | $5.00 | $50.00 | $100.00 | $200.00 |
| $25,000 | $12.50 | $125.00 | $250.00 | $500.00 |
These figures assume the balance stays the same all year and interest compounds daily. In reality, your balance will fluctuate. The bank calculates interest on your average daily balance, so deposits and withdrawals change what you earn.
If you keep $10,000 in a standard bank checking account earning 0.05%, you earn $5 per year. If you move that $10,000 to a savings account at the same bank earning 4.50%, you earn $450 per year. That $445 difference is why most people who want to earn interest keep their money in savings, not checking.
Checking versus savings: where to put your money
Use a checking account for money you spend regularly—rent, groceries, bills, everyday purchases. Use a savings account or money market account for money you want to keep but might need within a few months. Use a CD for money you will not touch for a set period (three months to five years), because CDs pay the highest rates.
Many people keep a small checking balance (enough to cover a month of expenses) and put the rest in savings. This way, you earn more interest on the bulk of your money while keeping enough in checking for daily use. Some banks let you link a checking account to a savings account so money can move between them easily.
If you have a large emergency fund or are saving for a goal, a high-yield savings account will earn you far more than any checking account. Current rates on savings accounts range from 4.00% to 5.35%, depending on the bank and market conditions. That is 80 to 100 times more than a standard checking account.
Tax reporting on checking account interest
Interest you earn on a checking account is taxable income. If you earn $10 or more in interest during the calendar year, the bank will send you a Form 1099-INT by January 31 of the following year. You report this on your tax return.
If you earn less than $10, the bank does not have to send a form, but you still owe tax on the interest. Keep your own records of interest earned if the amount is small.
The tax you owe depends on your tax bracket. If you are in the 22% bracket and earn $100 in interest, you owe about $22 in federal tax on that income (plus any state tax). This is one reason why the interest on checking accounts matters so little—the amount is small enough that taxes eat into it significantly.
Frequently Asked Questions
Can I get a checking account that earns as much as a savings account?
No. Even the highest-rate checking accounts (around 2.00%) pay less than most savings accounts (4.00% to 5.35%). Checking accounts are designed for spending, not saving. If you want to earn real interest, move money to a savings account or CD.
What happens to the interest rate if the Federal Reserve changes rates?
Banks adjust checking account rates based on Fed policy, but they do not always move at the same speed. When the Fed raises rates, some banks raise checking rates quickly; others take weeks or months. When the Fed cuts rates, banks often cut checking rates faster than they raise them. Check your bank's current rate regularly.
Do credit unions pay more interest on checking than banks?
Some do, but not all. Credit unions are member-owned, so they sometimes offer better rates than banks. However, you have to be a member to open an account, and membership requirements vary. Compare rates at your local credit union to rates at online banks before deciding.
Is it worth switching banks for a higher checking rate?
Only if you keep a large balance and meet the account requirements. If you have $500 in checking, switching from 0.05% to 2.00% earns you $7.50 more per year—probably not worth the hassle. If you have $25,000 and meet the requirements, you earn an extra $487.50 per year, which may be worth it.
Will my checking account interest change if I move money in and out frequently?
The rate stays the same, but the amount you earn changes. Interest is calculated on your average daily balance, so large withdrawals lower your average and reduce the interest you earn that month. Deposits raise your average and increase interest earned.