Most checking accounts earn little to no interest, but some banks do offer small rates

Most traditional checking accounts at large banks pay zero interest or so little that it rounds to nothing. A few banks—mostly online banks and credit unions—offer checking accounts with actual interest rates, though the rates are typically lower than what you would get from a savings account at the same institution. Whether you can earn interest depends on which bank you use and which account you open with them.

The reason most checking accounts don't pay interest is historical: banks have traditionally used checking deposits as cheap money to lend out, so they had no reason to pay you for the privilege. That model is changing slowly, especially at online banks where operating costs are lower and competition for deposits is higher.

Key Takeaways

  • Online banks and credit unions are more likely to offer interest-bearing checking accounts than traditional brick-and-mortar banks.
  • Interest rates on checking accounts range from near zero to around 4 or 5 percent annually, depending on the bank and current market conditions.
  • Some accounts require a minimum balance, direct deposit, or a certain number of debit card transactions per month to earn the advertised rate.
  • The interest you earn on a checking account is taxable income and will be reported to you on a 1099-INT form if it exceeds $10 annually.

Where to find checking accounts that pay interest

Online banks are the most common source of interest-bearing checking accounts. Banks like Ally, Charles Schwab, and Discover offer checking accounts with rates that change based on the Federal Reserve's rate decisions. These banks can afford to pay interest because they have no physical branches and lower overhead costs.

Credit unions often pay interest on checking accounts, sometimes called share draft accounts. The rate varies by credit union, and you must be a member to open an account. Credit unions are nonprofit, so they return profits to members through better rates and lower fees.

Traditional banks rarely offer interest on checking, but some do—usually only on premium accounts that require high minimum balances ($25,000 or more) or on accounts marketed specifically to business customers. Call your current bank's customer service line to ask whether any of their checking products pay interest.

What conditions come with interest-bearing checking accounts

Banks that pay interest on checking often attach conditions to earn the full rate. Common requirements include maintaining a minimum balance (often $500 to $2,500), receiving a direct deposit each month, or making a set number of debit card transactions (typically 10 to 15 per month). If you don't meet these conditions, the rate drops to zero or near-zero.

Read the account terms carefully before opening. Some banks advertise a high rate but only pay it on balances up to a certain amount—say, the first $25,000—and then pay almost nothing on anything above that. Others require you to maintain the minimum balance every single day of the month, not just at the end.

A few online banks offer no conditions at all and pay the same rate on all balances. These accounts are less common but worth seeking out if you want simplicity.

How interest rates on checking accounts compare to savings accounts

Interest rates on checking accounts are almost always lower than rates on savings accounts at the same bank. If a bank offers 4.5 percent on a high-yield savings account, the checking account might pay 2 percent or less. This is because banks want to encourage you to keep money in savings (which is harder to access) rather than checking (which you use for daily spending).

If you have a large amount of money sitting in checking, you may earn more by moving some of it to a savings account, even if the checking account does pay interest. The difference compounds over time, especially with larger balances.

How the interest is calculated and reported

Banks calculate interest on checking accounts using the average daily balance method. They add up your balance at the end of each day, divide by the number of days in the month, and apply the annual interest rate to that average. Interest is usually deposited into your account monthly, though some banks do it quarterly.

Any interest you earn is taxable income. If you earn $10 or more in interest during a calendar year, the bank will send you a 1099-INT form by January 31 of the following year. You report this on your tax return as interest income. If you earn less than $10, the bank is not required to send a form, but you still owe tax on the interest.

When it makes sense to switch to an interest-bearing checking account

If you keep a large balance in checking (more than $5,000) and your current bank pays zero interest, switching to an online bank or credit union could put real money back in your pocket. A $10,000 balance earning 3 percent annually generates $300 per year—not life-changing, but not nothing either.

If you keep less than $5,000 in checking, the interest you earn will be small enough that it may not be worth the hassle of switching banks. You also need to consider whether the new bank's checking account has fees, whether it offers ATM access you need, and whether you can easily transfer money to other accounts.

Some people open an interest-bearing checking account at an online bank and keep a second checking account at their local bank for in-person services. This approach lets you earn interest on the bulk of your money while keeping a small amount nearby for deposits and withdrawals.

Frequently Asked Questions

Do I have to keep a minimum balance to earn interest?

It depends on the bank. Some interest-bearing checking accounts require a minimum balance (often $500 to $2,500) to earn any interest at all. Others require a minimum only to avoid a monthly fee. A few online banks have no minimum balance requirement. Check the account terms before opening.

What happens to my interest rate if the Federal Reserve raises or lowers rates?

Interest rates on checking accounts move up and down with the Federal Reserve's benchmark rate. When the Fed raises rates, banks typically raise the rates they pay on checking accounts within days or weeks. When the Fed lowers rates, banks lower what they pay you. Your rate is not locked in.

Is the interest I earn on checking account taxable?

Yes. Any interest you earn is taxable income and must be reported on your tax return. If you earn $10 or more in a year, the bank sends you a 1099-INT form. You report this as interest income on your federal and state tax returns.

Can I earn interest on a joint checking account?

Yes. Interest is calculated on the total balance in the account, regardless of how many owners it has. Both owners are responsible for reporting the interest as income on their tax returns, though typically only one 1099-INT is issued (to the Social Security number listed first on the account).

Will switching to an interest-bearing checking account affect my credit score?

No. Opening a checking account does not affect your credit score because banks do not report checking accounts to credit bureaus. Your credit score is based on credit products like credit cards, loans, and lines of credit.