Interest-Bearing Accounts: What You Need to Know

Interest bearing accounts add money to the consumer or business account balance

An interest bearing account is an account at a bank or credit union that earns interest over a specified amount of time. The interest is paid to the account based on the account balance. Some banks have specified rules including an account balance requirement as to when they will pay interest to the account. In some cases there can also be a lowered interest rate or additional fees if the minimum account balance is not met.

Benefits

The benefit of an interest bearing account is that a business or consumer can earn money for keeping money deposited in the bank. In cases where the interest earned is at a higher rate, the interest can add a good portion to the account balance over the course of a few years. The interest earned can be used as extra income by the business or consumer to pay for emergencies and unforseen costs.

Reasons

There are many reasons why people open interest bearing accounts. A parent may choose to open an interest bearing account as a college savings account. In this case if the parent continues to add money over an 18-year period, thousands can be added to the balance as a result of the interest paid. A young couple can choose to open the account to save a down payment for their first home loan. In other cases a consumer may want to improve financial management and save money with added benefits.

Potential

Interest bearing accounts have the potential to be a good investment for some consumers and businesses. For a consumer the account can be used for extra income for the account holder. For example if the account holder wants some extra money, but does not want to withdraw from savings, he can choose to withdraw the interest earned. According to bankaholic.com, a rate comparison site, the average rate of interest earned on an interest bearing account can start as low as .5 percent to almost 4 percent. There is no set amount required to make withdrawals from an interest bearing account. In order to start earning interest many of the banks do require a minimum deposit of $500. This minimum balance is also required so the account holder can avoid fees.

Time Frame

A consumer can choose between different types of interest-bearing accounts. Some of the accounts have a set time when interest is paid (monthly, every six months, quarterly or annually) while other interest-bearing accounts allow the customer to choose the time when the account interest is paid. Among the customer's choices are interest payments on a monthly, quarterly or annual basis.

Expert Insight

The U.S. Department of Treasury suggests collecting the money on an interest bearing account if the consumer plans to close the account. If a consumer does not collect all the interest before the interest earning period is due the payments are typically not made to the consumer. The bank will typically retain the unpaid interest.