When you open a bank account, one of the very important things to consider is how the bank calculates the interest on your account. Different account types have different ways of calculating interest, like a savings account, checking account, and certificates of deposit (CDs). Understanding how your bank calculates interest can help you make informed decisions about where to save your money and how to maximize your earnings. In this article, you’ll explore how interest is calculated on your different bank accounts.
Savings accounts are a popular option for people who want to earn interest on their money while keeping it easily accessible. Most savings accounts compound interest daily, meaning the interest earned each day is added to the account balance and begins earning interest itself.
The interest rate on savings accounts is always lower than other types of accounts, but they are also generally more flexible and easier to access.
Lantern by SoFi professionals says, “The interest is paid to your account monthly.”
Checking accounts are designed for everyday transactions, such as paying bills and purchasing. While some checking accounts do offer interest, it is usually a much lower rate than savings accounts.
Some checking accounts have requirements, such as maintaining a minimum balance or making a certain number of transactions each month in order to earn interest. It’s important to read the terms and conditions carefully when opening a checking account to understand how interest is calculated.
Certificates of Deposit (CDs)
Certificates of deposit (CDs) are a type of time deposit account that requires you to keep your money in the account for a specific amount of time to earn interest. The interest rate on CDs is usually higher than savings and checking accounts, but you cannot withdraw your money without penalty before the CD’s maturity date. CD interest is typically calculated using a simple formula, meaning interest is calculated based on the initial deposit amount and the interest rate.
Money Market Accounts
Money market accounts are savings accounts that typically offer a higher interest rate than traditional ones. Money market accounts often require a higher minimum balance than other types of accounts, and they may restrict the number of withdrawals you can make each month. Like savings accounts, money market accounts typically compound interest daily.
High-Yield Savings Accounts
High-yield savings accounts are a relatively new type of account that offers a higher interest rate than traditional savings accounts. These accounts may have requirements, such as maintaining a minimum balance or making a certain number of monthly transactions, to earn a higher interest rate.
For example, high-yield savings accounts typically compound interest daily, and some may offer tiered interest rates based on your account balance.
Understanding how interest is calculated on your different bank accounts can help you decide where to save your money. Savings accounts are a good option for easy access to your money with a low-interest rate, while CDs offer higher interest rates but with a penalty for early withdrawal.
Checking accounts typically have low-interest rates but can be useful for everyday transactions. Money markets and high-yield savings accounts offer higher interest rates but may have higher minimum balance requirements and withdrawal restrictions. Read the terms and conditions carefully when opening a bank account to understand how interest is calculated and maximize your earnings.