Interest Bearing Checking Account

When looking for an interest bearing checking account, there are a couple of things to consider. Banks offer a few basic services. The two most common categories of services are non-transactional and transactional.

Non-transactional services have no direct bearing on financial transactions. They are supportive in nature, for example: marketing mail to customers, bank statements, handling phoned-in general queries.

Transactional services involve actual financial transactions, like: receiving deposits, servicing withdrawals, transferring account balances, granting loans, collecting loan payments, paying customers’ bills. Services under this category gave rise to the term “transactional account”.

A popular example of a transactional account is a demand deposit account, otherwise known as checking account. Before the advent of online banking, a checking account was used solely for business convenience and not for the purpose of savings or earning interest. Thus, originally no interest was paid on a checking account.

Now, with online banking much in vogue and becoming an industry of its own, an interest bearing checking account have become part of transactional services. This type of account has all the features of a traditional checking account, with interest earning capability added.

To some observers an interest bearing checking account is a cross-breed of the savings account and the traditional checking account. To others, it is a savings account with check issuance privilege added. Whichever school of thought you pick, you can’t lose.

Why can interest be paid now on a checking account? Actually it had been effectively going on for quite some time even before online banking came. In an effort to be competitive, banks designed the automatic transfer service to attract clients to open two types of account: savings and checking. The tacit purpose of automatic transfer was to circumvent the no-interest rule on checking accounts.

Innovative banks allowed their checking account clients to maintain only a minimum balance, and put the bulk of their funds in savings account. Clients could issue checks exceeding the minimum amount without penalty.

There was an important proviso though: clients had to maintain a certain level of “average daily balance” in their savings account in order to qualify for automatic transfer arrangement.

When checks issued by their clients came in, banks automatically transferred an amount equivalent to the total value of the checks from the clients’ savings account. Meanwhile, the untouched portion of the savings account earned interest. Banks used to tell their clients that, in effect, the latter were enjoying the benefits of an interest bearing checking account.

With online banking, it is not necessary to take the circuitous route anymore. Interest bearing checking accounts is a standard offering. You can open and use one if you meet the simple requirements.

Practically all online banks offer a interest bearing checking account. You just have to know where to look.