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What Is An Interest-Bearing Account?
An interest-bearing account is a type of bank account where an individual earns interest on the money deposited in the bank. This account serves two main objectives; customers earning interest on cash and banks accessing that amount for giving out loans.
High interest-bearing account rates help an individual earn more money. Individuals can open such accounts with banks, credit unions, or financial institutions. It enables a checking account cushion, and the deposits and withdrawals are flexible. However, a minimum balance rule is required to start an account.
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- Interest-bearing accounts facilitate the withdrawal facility and earn high interest on the remaining balance amount. The interest rate can range from 0.01-1.4%.
- It serves a dual purpose for banks and customers. The latter uses it to earn interest on the ideal cash, and the former to give out loans.
- The four types of interest-bearing accounts include checking, savings, money market accounts (MMA), and certificates of deposits (CD).
- For example, Apple Inc recently launched interest-bearing deposit accounts to authorize daily rewards to regular customers.
How Does An Interest-Bearing Account Work?
An interest-bearing account allows customers to earn high-interest rates by depositing some money. They can use some of it to pay bills, bearing interest on the leftover balance. It is like earning interest on the ideal money lying in the bank account. Here, the interest is slightly higher than the normal bank rates. For example, suppose a customer deposits $300, and the account uses $200 to pay bills. So, on $100, they will get 0.03% ($1000.3) by the end of the year.
The banks benefit a lot from the transactions of this account. When individuals deposit an amount, banks use it to fund their businesses. For example, a customer opens an account and deposits $10000. He uses $200 for paying bills. And, then the bank will use the remaining amount to give loans.
There are certain requirements that an individual must follow before opening an interest-bearing deposit account. The main features are:
- An individual needs to make a minimum deposit and balance amount.
- It comes with monthly maintenance fees along with high interest.
- Certain withdrawal penalties are applicable if there are more than six monthly transfers.
Types
Let us look at the main types of interest-bearing accounts:
#1 - Checking Interest-Bearing Accounts
Checking interest-bearing accounts are similar to current accounts, allowing individuals to deposit and withdraw money within their limits. Although banks do not give interest, few provide high rates to individuals. However, they need to pay maintenance fees every month.
#2 - Savings Accounts
Individuals can easily open savings accounts in any bank with a few steps. Here, the interest rates range from 0.01% to 1.4%. The main aim of this account is to save rather than spend. Therefore, the customers save more and proportionally earn more interest on it.
#3 - Money Market Accounts (MMA)
These accounts are a mix of savings and current accounts. Here, the customers receive the benefits of current account withdrawals. In addition, the savings intend to increase more with time. Also, MMA offers additional financial services to customers.
#4 - Certificates of Deposits (CD)
These are the type of savings accounts most feasible for individuals aiming for long-term savings. These are the best interest-bearing accounts for 1-5 years. So, if customers invest more, they will yield more interest.
Examples
Let us look at a few examples to gain a better idea:
Example #1
Suppose Jack wants to open an account with Union Bank. However, he wants some features that allow them to make great savings in the next five years. Therefore, the bank manager advises him to open an interest-bearing account that will enhance his savings in the long term period.
Thus, Jack opens an account and deposits $5000 in it. But, he faces an emergency of $2400 for bill payment and uses the account to withdraw the money. By the end of the year, he earned interest of 0.03% on the remaining balance of $2600. However, he would not have earned the same interest if he had deposited it in another account.
Example #2
In October 2022, Apple announced the launch of interest-bearing accounts to move into the fintech space. Goldman Sachs will administer these savings accounts. In addition, those users depositing an amount will win daily rewards on it. In another report, in November 2022, Russian banks will aim to open similar accounts in 2023.
Interest-Bearing Account vs Non-Interest-Bearing Account
Although interest and non-interest-bearing accounts are technically bank accounts, they have huge differences. While the former provides interest on the ideal balance in the account, the latter does reverse. The banks use the former to facilitate the funding of loan and mortgage activities. However, in the latter case, the individuals receive no interest. Customers tend to withdraw more, leaving no balance at the end.
As a result, there is no interest given. Examples of the latter include current accounts where they receive no interest payments. However, checking cushion accounts is an exception as they give facility for current accounts and still give interest to customers.
| Basis | Interest-Bearing Account | Non- Interest-Bearing Account |
| Meaning | An account that gives interest on the ideal money lying. | Here, the customers receive no interest on the deposited amount. |
| Purpose | To earn interest on the balance amount. | To withdraw money whenever needed. |
| Interest (%) | 0.01-1.4% | No interest |
| Exceptions | Nil. | Checking cushion accounts. |
| Types | High-interest savings account, Money market account, Certificate of deposits, and others. | Current account. |
Frequently Asked Questions (FAQs)
Banks also refer to these accounts as interest-bearing deposit accounts. However, the features tend to remain the same as the former.
Following are the steps to open a non-bearing deposit account:
● Select a bank providing this facility
● Fill in the details and documents required for opening an account.
● Read all the terms and conditions before signing.
● After opening, deposit a certain amount in the account.
● Withdraw as per the needs and pay a minimum $100 maintenance fee and a service charge of $80.
A nonprofit organization can open an interest-bearing deposit account and conduct daily operations. Nowadays, many banks offer this facility, allowing them to earn interest on the funded amount. Thus, using the amount for charity work.
Banks offer this bearing account because as the customers deposit money in the account, they get an opportunity to use that amount for giving loans. So, when they receive mortgage interest, a part of it is given to the earlier customer.
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