How Does a High-Yield Checking Account Work?

How Does a High-Yield Checking Account Work?

We're sure that you know better than to keep money under your mattress—especially when you can just use a checking account.

But, truth be told, checking accounts are essentially the modern-day equivalent of the mattress strategy: The cash sits in the account until you withdraw it—and, unlike a savings account, it may not earn interest.

But a high-yield checking account does earn a type of interest known as an annual percentage yield (APY), which is often calculated using interest that compounds more than once a year—which can grow faster than an APR. Many banks offer high-yield checking accounts to entice new customers to do business with them—the thought is that once you open a checking account, the bank can then persuade you to open a savings account or apply for a credit card, loan, mortgage or line of credit down the road.

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Some high-yield checking accounts even offer interest rates that are competitive with high-yield savings accounts, typically averaging between .20% and 3.25%. However, high-yield checking often comes with caveats. For one, you may need to maintain a minimum balance, as well as use your debit card a certain number of times each month. Another possible catch: You may need to forgo paper statements in favor of electronic ones. And, sometimes, banks even attach fees to high-yield accounts.

For these reasons, high-yield checking may not be the best option for most people. But could it be right for you?

RELATED: Find the Best Interest Rates for Money Market and Savings Accounts

Who Isn't a Good Match for High-Yield Checking?

First things first: If you live paycheck to paycheck, keep a very low balance in your checking account or you're the type of person who has to use overdraft protection to cover your bills, then you don’t need a high-yield checking account.

In fact, most people maintain a healthy portfolio without ever going the high-yield checking route. "We try to help people simplify their financial lives—not make it more complicated by piling on added accounts that they need to keep track of," says LearnVest Planning Services CFP® Elizabeth Sklaver.

And the truth, adds Sklaver, is that a high-yield checking account will only earn a few hundred dollars a year—and people who most need those few hundred tend to be the least equipped to manage their accounts effectively.

RELATED: I Want to Set Up a Savings or Checking Account

Who Is a Good Match for High-Yield Checking?

A high-yield checking account could be a fit if:

  • You're a high-income earner who generally carries a large balance ($10,000–$25,000) in your checking account each month—and you consistently spend less than you earn each month.
  • You're someone who keeps a lot of cash on hand for a specific reason—like a home purchase in a few years—and you have enough money sitting in your savings account that you’d be comfortable moving a small portion into high-yield checking if it meant that you could earn more at a better interest rate.
  • You're a retiree who normally likes to invest a portion of your cash portfolio in CDs, but when fluctuating CD interest rates are low, you'd consider a more competitive high-interest checking rate.
  • You keep meticulous track of your finances, and believe that you'd be more than able to meet the criteria necessary to maintain a high-yield checking account.

For instance, if you carry a $10,000 balance in an account that earns .5% a year, but you could earn 2% in a high-yield checking account, this means you'd earn an extra $150 a year—or $12.50 a month. Is that worth remembering to use your debit card a certain amount of times each month, among other trappings? Only you can decide.

What Else Do I Need to Know Before Opening an Account?

To get an idea of what you could earn using a high-yield checking account, start by looking at accounts that have been reviewed by Bankrate—or check out Kasasa to see what high-yield checking accounts are offered through credit union and community banks in your area.

Then be sure to go to your chosen bank's website and read the fine print. Many high-yield checking accounts require you to use automatic bill pay, direct deposit and electronic statements, so make sure that you can meet these monthly requirements before signing up.

If you do think high-yield checking is a fit for you, a word of caution: Avoid keeping your savings in this account. Money set aside for your big goals—a wedding, a house, a child, emergencies—are best kept in savings accounts, so it can't diminish with every swipe of your debit card.

RELATED: 10 Things You're Embarrassed to Ask About Banking

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial adviser for advice specific to your financial situation.

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