What Is an Interest-Bearing Account? 5 Common Types

If you are at a point in your financial path where you need to start putting money away, especially for an emergency fund, you will want to keep your money in a fund with easy access and limited fees.

For this reason, an interest-bearing account could be a solution for a short-term investment.

What is an interest-bearing account?

Simply put, an interest-bearing account is a bank account that keeps your money safe while you earn interest on the money you deposit.

There are several types of interest-bearing accounts with their own unique perks and drawbacks, so it’s important to pick the right one based on your current financial situation.

What Are Common Types of Interest-Bearing Accounts?

Here are 5 of the most common types of interest-bearing accounts to consider when choosing a place to deposit your money.

Checking Accounts

If you’re looking for a way to earn interest on your checking account balance, an interest-bearing checking account may be a good option for you.

One of the main benefits of an interest-bearing checking account is the ability to earn interest on your balance much like a savings account, which can help your money grow over time.

The interest rate on these accounts can vary depending on the bank or credit union and the amount of money in your account, but usually higher than the interest rate on traditional checking accounts.

Another advantage of an interest-bearing checking account is the ability to access your funds easily.

With a checking account, you can use your debit card to make purchases, withdraw cash from ATMs, and pay bills online.

Also, many banks and credit unions offer their own mobile banking app that makes it easy to check your balance, transfer funds, and deposit checks from your phone.

On the downside, interest-bearing checking accounts may come with monthly maintenance fees or minimum balance requirements, which can make earning the interest not as fruitful.

Additionally, some banks may have limitations on the number of transactions you can make in a given month, so it’s important to check with your bank to understand their policies.

Savings Accounts

Traditional savings accounts are as basic as you can get for a place to deposit money that you may need to access later.

They provide very few perks and pay next to nothing when it comes to interest rates.

However, this account is one of the safest, most accessible, and most convenient to use as you can easily transfer money between checking and savings accounts through your traditional bank making the funds instantly available.

If you are looking to keep your money in a safe account that you can access at the drop of a hat and earning compound interest really isn’t that important, then a traditional savings account is your best bet.

High-Yield Savings Accounts

High-yield savings accounts can offer several benefits over traditional banks and is a very popular interest-bearing account pick.

A high-yield savings account will typically offer a higher interest rate than a traditional brick-and-mortar bank, allowing your money to grow much faster.

Additionally, a high-yield savings account can be more flexible than a traditional account, with lower fees and minimum initial deposit and balance requirements. Like traditional banks, you also have the ability to easily transfer funds between accounts.

However, there are also a few downsides to consider when opening a high-yield online savings account.

For one, online banks may not offer as many services as traditional banks, such as in-person customer service or physical branches and ATMs.

Also, some online banks don’t have the same reputation as traditional banks, which could make some consumers hesitant to trust them with their money.

Another downside is that it can take a few days for funds to transfer from your online bank account into other bank accounts elsewhere. This is one main difference with traditional banks as those funds can be accessed immediately.

With that in mind, I can say that I’ve had a great experience overall with a couple of online savings banks. It’s been a convenient way to earn a much higher interest rate without sacrificing the convenience of accessing your money.

Money Market Accounts

Money market accounts, or MMAs, are similar to high-yield savings accounts, with a few differences.

While money market accounts can have a similar interest rate as online savings accounts, some money market accounts offer a debit card and act as an interest-bearing checking account making them more convenient to access your money.

However, there could be a limit to the number of transactions you can do per month, much like a savings account.

Additionally, money market accounts could require a higher minimum balance than online savings accounts, so choose these accounts wisely as these rates can vary between institutions.

Overall, a money market account could be an ideal choice if you are wanting more convenient access to your money with the perks of a higher interest rate yield than a traditional savings account.

Certificate of Deposit (CD)

If you really want to accelerate your savings growth and don’t need to access your funds for the foreseeable future, then a certificate of deposit is the best interest-bearing account on the list, with a couple of downsides I will mention later.

CDs offer the highest interest yields at a fixed rate depending on how long you are willing to lock up your funds.

They can range from a few months up to 5 years. The longer the term duration the higher the annual percentage yield (APY).

Also, when you purchase a CD for a certain term length, your interest rate is guaranteed through the duration of the term regardless of market fluctuations, keeping your interest growth predictable and stable.

Beware! Some certificates of deposit can require a minimum balance of at least $500 depending on the term length, but there are a few banks out there that offer no minimum deposit.

Additionally, like savings and money market accounts, they are FDIC-insured making them a safe option if you choose to go for a longer term.

Certificates of deposit are a great stepping stone once you have your emergency fund in place and can start investing your money into other high-interest assets which you won’t need access to them for a while.

FAQ

Are Interest-Bearing Accounts Worth It?

Interest-bearing accounts, such as savings accounts, money market accounts, and certificates of deposit, can offer higher interest rates than a traditional checking account.

This can help you earn more on your savings over time. Also, many interest-bearing accounts are FDIC-insured, providing protection for your money.

However, interest-bearing accounts can come with fees or minimum balance requirements, which can kill your interest earnings.

Additionally, some accounts, such as certificates of deposit, may require you to keep your money locked up for a specific period of time, limiting your access to your funds.

While interest-bearing accounts offer some level of protection for your money, inflation can erode the purchasing power of your savings over time but will have better results than earning little to no interest.

What Is the Best Type of Interest Bearing Account?

Long-Term: If you are looking for the highest return and don’t mind your money being tied up for a while, then certificates of deposit (CDs) will give you the highest interest rate. Your rate of return is guaranteed for the duration of the term length making it predictable. Plus, the longer the term length you choose on a CD, the higher the rate of return will be.

Short-Term: If you are looking for the highest yield for your money but still want the fluidity of a regular savings account, then an online savings account would be your best option.

You can find many online savings accounts with very minimal balance requirements and no monthly fees.

However, you may have to wait a few days for transfers to complete making them not as convenient and fast as a checking account or traditional savings account, but based on the rate of return and convenience, online savings accounts are a smart short-term move.

Conclusion

An interest-bearing account can be a great way to earn more on the money you want to put away while minimizing risk.

Whether you are looking for a short-term fluid solution such as a high-yield savings account or a long-term option with better rates like a certificate of deposit, there are a variety of options to choose from depending on what your goals are.

Remember, it’s important to carefully consider the fees, limitations, and access to your funds before making a decision. The last thing you want to do is tie up the money you will need later and pay early withdrawal fees!

Take your time, explore your options, and know that there is an interest-bearing account out there to help you reach your money goals.