What to Know About Interest-Earning Checking Accounts

Interest-earning checking accounts provide a convenient ways to keep your money earning interest and quickly available. But they often have strings attached to them. In fact, service charges, minimum balances, fees for checks and other fine-print items can create what seems to be an impenetrable jungle.

If you can meet the requirements, you can earn up to 4% at more than 700 community banks and credit unions with a high-yield checking account. You must sign up for direct deposit, use your debit card a certain number of times or log on to online banking each month. The yield drops to the bank's standard payout if you don't meet the monthly qualifications. Another bonus: The accounts charge no ATM fees -- and reimburse surcharges from other banks. To find a high-yielding account, go to CheckingFinder and enter your zip code. The site lists accounts guaranteed by the Federal Deposit Insurance Corp. and National Credit Union Administration. Another source is DepositAccounts.com, which lists accounts available nationwide at banks and credit unions.

The key to choosing the right account lies in the minimum-balance requirement. If you don't maintain that balance, you'll probably have to pay a service charge, and it can easily exceed what you earn in interest. Suppose, for example, you kept an average balance of $900 in an account on which you got 2% interest but which required a $1,000 minimum balance to avoid service charges. You'd earn about $1.50 in monthly interest, but you'd pay the service charge because your balance was under the minimum. If that charge were, say, $5, you'd be $3.50 a month in the hole.

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Some banks, credit unions, and savings and loan associations require a lower minimum balance than others and charge smaller service fees, so shopping around can pay off. Credit unions often offer the most attractive terms on their accounts, which they call share-draft accounts.

Sometimes you think you're meeting the minimum-balance requirement but lose out on interest because of the way the institution computes it. Here are the key questions to consider:

How is the minimum balance determined? Some institutions add up your balance at the end of each day; if it falls below the minimum for even one day in a monthly cycle, you're charged the full service fee. With an average-balance requirement, your account can drop to zero for days at a time. But as long as you deposit enough to bring the monthly average up to the minimum, you won't have to pay a service charge.

What fees will you pay? If your balance dips below the minimum, you may be charged for every check written during the month or at least for those written while your balance was too low. Also, you may run into a loss of interest charge for all or part of the period when your account dips below a certain amount.

How is interest calculated? Interest-earning checking accounts generally pay interest daily. However, at credit unions, for instance, dividends that are paid on share-draft accounts may be based on the lowest balance during a dividend period, which can be a month or as long as a quarter. But because credit unions often don't set minimum-balance requirements or charge service fees, share-draft accounts can still be a better deal.

You'll get the very best deal on interest if it is figured from day of deposit to day of withdrawal, or on your average daily balance over the period being measured. In either case you get credit for all the money you have in your account.

If maintain a very low balance, you might be better off with a traditional checking account that pays no interest. Regular checking-account fees are generally set below the fees for interest-earning accounts.