Whether you’re looking for a place to save for a big event or in case of an emergency, you may want to open an interest-bearing account. These accounts are best if you want to earn a little something back for letting the bank hold onto your money. But what is an interest-bearing account and which one is best for your needs?
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What Are Interest-Bearing Accounts?
Interest-bearing accounts are types of bank accounts where you can keep your money safe while earning interest. When you deposit money into an interest-bearing account, the bank pays you interest (money) based on a percentage of your account balance.
There’s no set standard for how much you’ll earn in interest since each financial institution has different payouts based on the type of account you open.
Types of Interest-Bearing Accounts
There are different types of accounts that pay depositors interest. The best type of savings account for you depends on when you need to access your money and your goals. Here are the different types:
Savings account
This is the white bread of interest-bearing accounts. Savings accounts are super basic, day-to-day accounts that many banks offer. Most institutions allow you to link your savings account to your checking account to move money back and forth, although you’re not required to open a savings account at the same place as your checking account. The money is typically easy to access, which makes it a good place to stash your emergency fund.
At the same time, this type of interest-bearing account pays customers very low interest rates, usually around 0.01% APY. If convenience is your biggest priority, a savings account may be the right choice.
High-yield savings account
A high-yield savings account typically offers higher interest rates than traditional banks. That’s because these types of accounts are offered mainly through internet-only banks, credit unions, and the online banking arms of the traditional banks. In other words, because they don’t have to pay for the bricks-and-mortar trappings, they can afford to pay customers higher rates. Right now, most high-yield savings accounts hover around 4% APY — some even more.
You can transfer money in and out of a high-yield savings account, but it may take a little longer for transactions to go through. Be aware of that potential lag time and lack of access to a bank teller or physical location, if that’s a priority.
Certificates of deposit (CDs)
A CD pays a fixed rate of return in interest as long as you don’t withdraw your money for a certain period of time. Typically, the longer you keep your money in a CD, the higher the interest rate you’ll earn. That length of time can range from a couple of months to a few years.
A CD would be a good place to put money you don’t plan on spending for a while (for instance, saving to buy a house or a car) since withdrawing money early could mean you get hit with penalties.
Money market account (MMA)
This type of account is a hybrid between a savings and checking account. MMAs typically require a larger minimum deposit, but they come with the perks of a checking account — like check-writing abilities and a debit card.
MMAs may offer higher interest rates than savings accounts — closer to what you’ll earn in a high-yield online savings account. But you might be limited to the number of withdrawals you’re allowed each month.
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Is Your Money Safe in an Interest-Bearing Account?
With the rise in bank failures this year, you might be cautious about keeping your money safe in an interest-bearing account.
Most banks are federally insured by the Federal Deposit Insurance Corporation, or FDIC. This protects accounts up to $250,000 in case of a bank failure. That means if your bank goes under, you’ll get up to that amount (but if you have more in that account, you may not see it all). If this worries you, consider opening a few different accounts to spread out your money in case something happens.
Before You Open an Interest-Bearing Account
It’s important to note that interest-bearing accounts may also come with some annoying fees. Look at the actions that trigger those fees to help you decide which is the best account for savings habits. Also look at minimum opening and ongoing balance requirements, withdrawal limitations, and other requirements on your end before opening an account.
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