When was the last time you thought about your checking account? If you’re like many people, it was probably the last time you wrote a check or paid a bill that wasn’t set up on autopay.
Checking accounts tend to exist in the background of our lives, warranting so little thought that many of us are still using accounts we first set up in high school or college.
Although we rarely think about their logistics, checking accounts impact almost every aspect of our lives–we use them for everything from buying groceries with our debit cards to transferring money back and forth between friends to paying our monthly bills.
The truth is, however, that your checking account could be hurting your financial health through low-interest rates.
Fortunately, there are alternatives to low (or no) interest checking accounts, such as high-yield checking accounts. And, many people are even choosing to leave checking accounts behind altogether and put their money into cash management accounts that often provide higher interest rates with fewer fees and restrictions.
Here’s what you need to know about checking account interest rates, and what you can do to start earning more on your spending account.
What is the Average Checking Account Interest Rate?
In return for putting money in your checking account, many banks pay interest. Checking account interest is a set percentage of the total amount of money you keep in your account and is paid out periodically. Unfortunately, checking account interest rates have been slowly decreasing.
In fact, the average checking account interest rate is only 0.04%, which means that even if you left $5,000 in your checking account for a year, you’d only earn $2 in interest.
While 0.05% is the average, plenty of banks are only paying out 0.01% in interest rates. Banks with 0.01% interest rate will pay merely 10 cents in annual interest for each $100 in your account.
Sometimes banks with low checking account interest rates also charge fees to maintain your account. Because interest rates are not high enough to offset the cost of these fees, you might actually be losing money by using your checking account.
Checking Account Interest Rates vs. Inflation
There’s another major downside to keeping your cash in a checking account with a minuscule interest rate: inflation. While many of us think that cash is king, the fact of the matter is that the dollar devalues over time as inflation rises.
Inflation, which is the increase in prices over time, means your dollar has less purchasing power than it did when you first got it. In short, each of your dollars is worth less as inflation increases.
When your grandpa complains about having to pay $15 to see a movie when tickets were only 46 cents in 1950, he is talking about the effects of inflation. The value of a movie ticket is the same, but it takes much more cash to make that purchase.
When we plan for the future and save for retirement, we all tend to assume that our money will be worth the same amount in the future as it is today. That’s why many of us don’t worry about leaving our cash languishing in a checking account with a low-interest rate.
The truth, however, is that your money may well have less purchasing power in the future due to inflation. The pennies that many banks pay you in interest won’t help you avoid inflation.
That means that on top of losing money in fees paid to your bank to keep your checking account open, you may also end up with money that is worth less by the time you wish to withdraw it.
A .05% interest rate is not enough to counteract the current inflation rate in the U.S., which is 2.9% .
Alternatives to Low-Interest Checking Accounts
The good news is that there are a couple of alternatives to leaving your money sitting in a checking account with an extremely low interest rate, or no interest at all.
High-Yield Checking Accounts
One option is going with a high-yield checking account, sometimes referred to as a “rewards” checking account, which are often offered by smaller banks, online banks, and credit unions.
These accounts can have interest rates as high as 4%, but it can be important to read the fine print.
Often, these rates come with restrictions that limit the amount of money that can earn the higher rate, such as only the first $3,000. The rest of your cash may be then subject to a much lower rate.
Also, because many high-yield checking accounts are offered by regional banks or credit unions, you may run into difficulty finding in-network ATMs.
Before opening a high-yield checking account, it can be a good idea to find out about any monthly or other types of fees, including fees for going to an out-of-network ATM, as these could erode the higher interest rate.
You may also want to make sure the institution offers a user-friendly website and mobile app.
Cash Management Accounts
A cash management account is an account that combines the services of a spending account and a savings account in one product.
These accounts are often offered by online financial service providers and can, in many cases, provide above-average interest rates and reasonable or no fees due to the low overhead.
Indeed, some cash management accounts have annual percentage yields that are higher than what many brick-and-mortar banks offer for their savings accounts.
Cash management accounts also often come with mobile check deposits, broad ATM networks, check writing, autopay, money transfers, overdraft programs and more.
Low interest rates, combined with increasing fees and other restrictions, has created a situation in which many people are actually losing money through fees, or risking the devaluation of their money by keeping it in a low-interest checking account.
Fortunately there are other options that offer easy access to your spending money but also higher interest, such as high-yield (or rewards) checking accounts, which are often offered through smaller and online banks, as well as credit unions.
Looking for Something Different?
You may also want to consider a cash management account, such as SoFi Money®.
With SoFi Money, you can earn competitive interest, spend, and save all in one account. You can also write checks, use a debit card, send and receive money, and withdraw cash at 55,000+ (fee-free) ATMs worldwide.
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
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