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Understanding bank account interest rates is important for your financial planning. Bank account interest rates can add to your financial growth and longer-term outlook for your future. Knowing how banks use interest rates can help you be a financially literate consumer.

Bank Interest Rates

As financial consumers, you may wonder how banks work and what banks do with your money when you deposit it. One of the things that banks do with your money, besides keeping it for you, is investing the money with other people or businesses. While this may seem that the banks are not doing what they should with your money, investing your money benefits you. Furthermore, this practice of investing is usually safe because of bank account interest rates and FDIC or other financial safeguards.


When you open an account for bank account interest rates, you need to have confidence in the bank that is keeping your money safe while lending it to others. The best way that banks can ensure your money is through the Federal Deposit Insurance Corporation (FDIC). The U. S. Congress created the FDIC as an independent agency to insure bank deposits. The way it ensures bank deposits and accounts is by examining and supervising financial institutions for consumer protection, management of receiverships, as well as bank safety and soundness. The FDIC helps to insure consumers by insuring deposited money up to $100,000. When the FDIC insures money this means if the bank goes out of business, your money will be safe and you will still be able to access your accounts. Similarly, an organization called the National Credit Union Administration (NCUA) will insure credit union accounts up to $250,000 if you have a savings account with a credit union.

What is an Interest-bearing Bank Account?

Savings accounts are one type of an account that can have bank account interest rates. However, there are other forms of interest-bearing bank accounts. Some checking accounts will pay interest to you if you are an account holder.  Checking accounts, however, usually, pay less interest than savings accounts. Certificate of deposit (CD) accounts also can give interest if you commit your funds for a predetermined time in exchange for a higher interest rate.

What Is Interest?

Bank account interest rates are money that is calculated as a percentage of your deposit balance. It is money paid to you for the privilege of using your money. Essentially, a savings account is an interest-bearing account. When you open an account and keep the money in the bank, the bank will pay you interest when you keep the money in the bank. 

The bank loans that money out to other people or businesses. By depositing money in a bank, you give the bank permission to use your money to give loans. The interest amount on the money you deposit is usually an annual rate, but interest can be calculated for longer or shorter periods than one year.

Interest Adds Up

The great thing about bank account interest rates is that the rates compound daily. The money you earn through interest rates is paid monthly to your bank account. Furthermore, the bank pays you interest on the interest they owe you. A bank account that pays you one percent interest, gives you 1/365th of the one percent of the money in your account as interest. This adds up as you deposit more money into the bank. 

How Much Do You Earn Interest? 

The amount you earn in interest from bank account interest rates depends on several factors. Some factors are the interest rates a bank will give you and the rates set nationally that influence the interest rate that the bank gives you.

Types of Interest-Bearing Accounts

There are various types of interest-bearing accounts you can consider. Some interest-bearing accounts are savings accounts, checking accounts, and certificates of deposit.

Savings Accounts

Savings accounts are common types of bank account interest rates accounts.  Savings accounts keep your money in a safe place where the money will earn interest each month. These accounts often require low minimum balances or no minimum balances, depending on the bank and account.

How Savings Accounts and Interest Work

Savings account are accounts that earn interest. When you open an account with bank account interest rates and keep the money in the bank, the bank will pay you interest. You earn this interest only if you keep the money in the bank. The bank loans your money out to other people or businesses. If you deposit your money in a bank you give the bank permission to use your money to give loans. 

The loan costs the person who has the loan in the form of an interest rate the banks collect. However, the loan doesn’t cost you interest. Instead, the amount that the bank uses from your account is given back to you as well as a small amount of money called interest that pays you for allowing the bank to loan your money out. The loan doesn’t mean you lose your savings or that you can’t have your money when you need it because the bank invests your money. Saving accounts interest means the bank is giving you money for investing your money. 

Benefits and Downsides of a Savings Account

Savings accounts are useful for bank account interest rates because thee accounts are easy to open. The accounts are liquid cash accounts and not tied up in investments.  Many financial institutions have low minimum requirements for the balance. The downside for a savings account is that you won’t have high returns on your deposits.

Banking Costs

It’s normal to worry that you can’t budget for a bank account interest rates account, but many financial institutions only have minimum requirements for your savings account balance. The low minimums are especially true of credit unions often with low minimums such as $20 or less to open a savings account that will typically have no fees. Compare savings rates at different banks and credit unions to get the best savings rates for you.

Interest-bearing Checking Accounts

Interest-bearing checking accounts are another form of investing with bank account interest rates. Similar to savings accounts, checking accounts can give you interest except the accounts are tied to checking accounts. These accounts can be part of your overall financial strategy for earning interest rates.

Benefits and Downsides to Checking Accounts

The benefit of having a checking account when you have bank account interest rates is that you can write checks with the account. However, most banks require a minimum deposit for the checking account, and will fine you if the checking account dips below a certain amount predetermined by the bank.

Certificates of Deposit

A certificate of deposit (CD) is a federally insured savings account with a fixed interest rate and date of withdrawal. The date of the certificate of deposit’s withdrawal is known as the maturity date. 

Benefits and Downsides of Certificates of Deposit

bank account interest rates

Primarily, certificates of deposits have higher interest rates, and the accounts are insured by the FDIC. These interest-bearing accounts aren’t as flexible as savings accounts. Share certificates, the credit union version of certificates of deposit are insured by the National Credit Union Administration. Both certificates of deposit and share certificates are less flexible than savings and checking accounts. 

These certificates require that you leave your money for a certain length of time, called terms, to mature the certificate. The lengths of the terms can be as short as a few months or as long as decades, but the standard range is between three months and five years. Usually, there are high-yield three-month, six-month, or one-year certificate of deposits, if you need a short-term allocation of your funds.

Penalties and Certificates of Deposit

If you withdraw the money from the certificates before the agreed time you are subject to financial penalties. The longer you have your money in a certificate of deposit, the more you will earn. However, if there is any reason you may need the money for emergencies, it is better for you to have a high-yield savings account than a certificate of deposit. Most certificates of deposit will have these conditions of long-term deposit requirements, with a few exceptions.

FDIC/NCUA Coverage of Certificates of Deposit

FDIC and NCUA insurance doesn’t cover the penalties if you withdraw your money early from a certificate of deposit. Both will cover your certificates of deposit if you keep the money in the certificates until the end of the term. It’s possible to have multiple certificates of deposits with varying term lengths.

Specialty Certificates of Deposit

Certificates of deposit usually come with fixed terms and fixed rates of return. Some banks offer other varieties.

Bump-up Certificates of Deposit

You can request a higher rate with these certificates of deposit if your bank increases its Annual Percentage Yield (APY). APYs are the real rate of interest return on your deposit. These certificates of deposit usually have lower interest rates than fixed-rate certificates of deposit, with some carrying higher minimum deposit requirements. Typically, you can request only one rate increase. However, some banks will allow you to request a higher rate if you have long-term certificates of deposit.

Step-up Certificate of Deposit

This certificate of deposit has rate increases that are more predictable, where your APYs will automatically go up at preset intervals.

Liquid Certificates of Deposit

These certificates of deposit are low or no penalty for early withdrawal, but these certificates usually have lower interest rates and yield less money than traditional certificates of deposit. The accounts also require you to maintain a minimum balance or incur penalties.

Jumbo Certificates of Deposit

 Jumbo certificates of deposits have a high minimum balance requirement for the initial deposit in exchange for higher rates.

IRA Certificates of Deposit 

An IRA certificate of deposit is a regular certificate of deposit you can have in an individual retirement account.

Final Thoughts

Bank account interest rates are important considerations when you are trying to save money, but you must also think of the flexibility of the accounts you use in long-term and short-term financial planning.

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