Yes, some checking accounts pay interest, but the rate is usually very small

Most checking accounts at traditional banks pay zero interest. Your money sits in the account and earns nothing. But some banks and credit unions do offer checking accounts that pay interest — typically between 0.01% and 2% per year, depending on the bank and how much money you keep in the account.

The catch is that the interest is often tiny. On $1,000, an account paying 0.01% per year earns about 10 cents. An account paying 2% earns $20. The higher rates usually come with conditions: you might need to make a certain number of debit card purchases each month, set up direct deposit, or keep a minimum balance.

Interest-paying checking accounts exist, but they are not common. You will find them mostly at online banks, smaller regional banks, and credit unions rather than at the largest national banks.

Key Takeaways

  • Interest rates on checking accounts range from nearly zero to around 2%, and the actual dollars earned depend on how much money you keep in the account.
  • Banks that offer higher rates often require you to use your debit card a set number of times per month, receive direct deposit, or maintain a minimum balance.
  • Online banks and credit unions are more likely to offer interest-bearing checking accounts than large national banks.
  • The interest you earn on a checking account is taxable income, and you will receive a 1099-INT form at tax time if you earn $10 or more.
  • A savings account or money market account may earn more interest than a checking account, but you cannot spend from it the same way.

How interest rates on checking accounts are set

Banks decide what interest rate to offer based on what the Federal Reserve does with its own rates. When the Federal Reserve raises its rates, banks have more room to offer higher rates to customers. When the Federal Reserve lowers its rates, banks lower what they pay you.

Banks also compete with each other. An online bank with lower overhead costs might offer a higher rate to attract new customers. A credit union might offer a better rate to its members. A bank in a competitive market might pay more than a bank in a less competitive area.

The rate you see advertised is usually the rate for new customers or for accounts that meet certain conditions. Once you open the account, the rate can change at any time, and the bank will notify you by mail or email.

Conditions that come with higher interest rates

Banks do not offer higher interest rates without expecting something in return. Common requirements include:

  • A minimum number of debit card purchases per month — often 10 to 15 transactions. This means you have to use your card to buy things, not just withdraw cash.
  • Direct deposit of your paycheck or other regular income into the account.
  • A minimum balance you must keep in the account at all times — sometimes $500, sometimes $1,500 or more.
  • Maintaining a certain number of other accounts with the same bank.
  • No more than a set number of withdrawals per month.

If you do not meet these conditions, the bank will drop your interest rate to a much lower one — sometimes 0.01% or lower. Read the account agreement carefully before you open the account, so you understand what you have to do to keep the higher rate.

Where to find interest-bearing checking accounts

Online banks are the most common source. Banks like Ally, Charles Schwab, and Discover offer checking accounts with interest rates that change based on what the Federal Reserve does. You can open these accounts entirely online, and you do not need to visit a physical branch.

Credit unions often offer interest-bearing checking accounts to their members. If you belong to a credit union, ask what rates they offer. You may need to meet membership requirements or maintain a certain balance.

Some regional and community banks offer interest-bearing checking accounts, but you will need to call or visit to find out. The rates and conditions vary widely, so it is worth comparing a few options in your area.

You can compare current rates on websites like Bankrate, DepositAccounts, or the Federal Deposit Insurance Corporation (FDIC) website, which lists rates at banks across the country. Keep in mind that rates change frequently, so a rate you see today may be different next month.

Interest-bearing checking versus savings accounts

A savings account usually pays more interest than a checking account. The trade-off is that you cannot spend from a savings account the same way. You cannot use a debit card, and there are limits on how many times per month you can withdraw money.

A money market account is a middle ground. It pays more interest than a checking account but less than a high-yield savings account. You get a debit card or checkbook, so you can spend the money, but there are usually limits on how many checks you can write or withdrawals you can make per month.

If you need to spend money regularly, a checking account makes sense even if it pays less interest. If you are saving money you do not plan to touch for a while, a savings account or money market account will earn you more.

Tax reporting for interest earned

Interest you earn on a checking account is taxable income. If you earn $10 or more in interest during the year, the bank will send you a 1099-INT form by January 31 of the following year. You will report this on your tax return.

The bank will also send a copy to the Internal Revenue Service (IRS), so the IRS will know how much interest you earned. If you do not report it, the IRS may contact you.

The amount of tax you owe depends on your overall income and tax bracket. If you earned $20 in interest and you are in the 22% tax bracket, you would owe about $4.40 in federal income tax on that interest. State income tax may explore as well, depending on where you live.

Frequently Asked Questions

Is the interest on a checking account worth it?

It depends on how much money you keep in the account. If you have $10,000 in an account paying 2%, you earn $200 per year. If you have $500 in an account paying 0.01%, you earn 5 cents per year. For most people with modest balances, the interest is small, but it is better than earning nothing.

What happens if I do not meet the requirements for the higher interest rate?

The bank will lower your interest rate to a much lower one, often 0.01% or less. You will still have the checking account and can use it normally, but you will earn almost no interest. Check your account agreement to see what the "default" rate is if you do not meet the conditions.

Can I lose money if the interest rate drops?

No. The interest rate is what the bank pays you on your balance. If the rate drops, you straightforward earn less interest going forward. Your actual money in the account stays the same.

Do I need a lot of money to open an interest-bearing checking account?

Not always. Some banks have no minimum balance requirement. Others require $500 or $1,000 to open the account, and some require a higher balance to earn the advertised interest rate. Check the account details before you open it.

What is the highest interest rate I can find on a checking account right now?

Rates change frequently and depend on what the Federal Reserve does. As of now, the highest rates are usually between 1% and 2%, but this varies by bank and by month. Check Bankrate or DepositAccounts to see current rates at different banks.