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What Is an Interest-Bearing Account?

HerMoney Staff  |  July 20, 2020

No matter your savings goal, you’ll need a place to keep that cash safe. Store it where you can earn a bit extra, like an interest bearing account.

Setting up an interest-bearing account is the way to go when you need a place to stash some cash and you want to earn a little something back for letting the bank hold onto your money. But, first things first: What IS an interest-bearing account? And which type of interest-bearing account is best for your needs?

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. 

Types of Interest-Bearing Accounts

There are different types of accounts that pay depositors interest. They include savings accounts, high-yield online savings accounts, money market accounts and Certificates of Deposit. The best type of savings account for you depends on your timeframe, goals and administrative needs. 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 most banks offer. Most banks allow you to link your savings account to your checking account to move money back and forth. The money is typically easy to access, which makes it a good place to stash your emergency fund.  At the same time, if you struggle to save and the money is too easy to access, you might want to either set up a savings account at a different bank or explore other account options below. The downside to plain old savings accounts is that they often pay customers very low interest rates. But 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 offered at 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. 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) if that’s a priority.

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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 ability and debit card usage. MMAs may offer higher interest rates than savings accounts — closer to what you’ll earn in a high-yield online savings account. You may also be limited to the number of withdrawals you’re allowed each month.

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 months to years. A CD would be a good place to put money you don’t plan on spending for a while (e.g. savings to buy a house or a car) since withdrawing money early can incur penalties.

Caveats

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. 

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Editor’s note: We maintain a strict editorial policy and a judgment-free zone for our community, and we also strive to remain transparent in everything we do. This post contains references and links to products from our partners. Learn more about how we make money.
Editor’s note: We maintain a strict editorial policy and a judgment-free zone for our community, and we also strive to remain transparent in everything we do. Posts may contain references and links to products from our partners. Learn more about how we make money.

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