Interest-bearing accounts can include savings accounts, money market accounts, certificates of deposit (CDs) and more. For many savers, these accounts are integral to basic financial planning and boosting savings.
An interest-bearing account is a type of account that pays you for keeping your money in it. The financial institution calculates interest based on your balance and credits it to your account, usually on a monthly basis or daily basis.
The higher the interest rate and the more money you keep in the account, the more you earn. Interest-bearing accounts grow your savings passively over time.
On the opposite side of the spectrum, a non-interest-bearing account means your money doesn’t earn any dividends month to month. For example, most checking accounts are non-interest-bearing.
There are plenty of interest-bearing accounts to compare, and you can have multiple types to diversify your savings.
SoFi Checking and Savings
Axos ONE
One Cash
When comparing interest-bearing accounts, you’ll see a number and “APY,” such as 0.45% APY.
APY stands for Annual Percentage Yield, and the number before “APY” tells you how much interest you will earn over one year. For example, if you deposit $100 in a 5% APY account for one year, you’d earn $5 with yearly compounding interest.
How the interest compounds also determines how much you can earn. Daily compounding interest means that the interest on your money is calculated and added to your account balance daily. Each day, the new interest is calculated based on your original balance plus any interest already added. Therefore, you’ll earn more interest with a daily compounding account than with a yearly or monthly one.
Using the same example as before, $100 in a 5% APY account with daily compounding interest can yield $5.13 in one year. While it’s only $0.13 more than a yearly compounding account, it adds up over time.
While comparing accounts, you may also notice some labeled as “fixed” or “variable” when describing the interest rate.
A variable interest rate can change at any time, whereas a fixed rate stays the same over a set period.
For example, savings accounts have variable interest rates. The bank can raise or lower your APY whenever they’d like, often in response to market changes.
CDs, however, typically offer fixed interest rates. While the account is open, the bank can’t adjust your CD rate, which can be a good or bad thing, depending on the market.
Interest-bearing accounts have very few disadvantages, which is why they’re so popular. But if you’re seeking an account for spending or investing, you might have to look elsewhere for that flexibility.
Savings accounts and CDs are two of the most popular interest-bearing accounts out there, and for good reason. By simply keeping your money in those accounts, you earn interest passively.
But not every interest-bearing account is created equally, so be sure to compare all your savings options.
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