The pandemic has drawn investors, customers, and borrowers into banks as interest rates dropped to near zero. In the last two years, the economy has regained its footing as businesses continued to recover and rebound. Consumption and production rose amid improved labor market conditions. Housing demand skyrocketed as properties became more promising investments.
However, all these put upward pressure on prices, with inflation setting a new all-time high in forty years. These were exacerbated by the Russo-Ukrainian War and slow port reopening in other regions. Shortages and softening demand became unfavorable for the global economy.
To that end, central banks like the Fed responded immediately to combat inflation and ensure macroeconomic stability. Its conservative action led to a series of interest rate hikes that peaked in the first quarter of 2023. It proved effective as inflation decelerated and plunged to 3% despite the SVB collapse earlier this year.
Recently, inflation has rebounded in the past two months, even exceeding the 3.6% consensus. While we can attribute it to external forces like the OPEC oil supply, policymakers are preparing for potential consumer spending splurge ahead of the holiday season.
The Fed left interest rates the same during its September meeting. However, it hinted at its plan to raise rates again in November after pausing rate hikes for three consecutive quarters. Once again, recession fears are seeping through every household.
On a lighter note, investors and banking clients see this uptrend as an opportunity to gain more deposit yields. High-interest bank accounts have become more in demand as interest rates become more appealing to depositors.
High-interest checking and money market accounts are more popular today due to their flexibility and quick access to funds. In this article, we will check the macroeconomic condition in the US and discuss high-interest checking accounts and why it’s good to have one.
The Current Macroeconomic Condition in The US
Inflation has become manageable after decelerating from 9.1% in June 2022. Yet, the central bank is still not confident enough to conclude that it has already conquered inflation. It is still much higher than the Fed’s target range and analysts’ expectations. As such, it keeps its options open, hinting at a potential rate hike if October inflation exceeds estimates.
We have noted that it rose to 3.7% in August and September versus the 3.6% consensus. Weak external factors, such as higher oil prices, OPEC oil cuts, and the Israel-Hamas War, must be accounted for. Oil and fuel may have increased demand in the coming months due to Winter. Also, there may be higher consumption, driven by the holiday season.
Moreover, increased wages may have a multiplier effect on consumer spending. In the third quarter of this year, the median wage reached $1,118, or a 4.5% YoY and a 1% QoQ increase. These will lead to a higher purchasing power.
It may also translate into higher labor costs, making production costlier. Companies may pass it on to consumers by raising prices. Meanwhile, housing prices have picked up since August.
To that end, the Fed may still not achieve its inflation target of 2%. Additionally, it may keep its policy rates elevated to stabilize the economy. Currently, the interest is at 5.5%. The Fed may leave rates unchanged or increase them by 25 basis points.
Increasing interest rates may be a double-edged sword for the US economy. It may slow inflation but discourage loans and lower bond and stock value. The same applies to the banking industry.
Banks must maintain excess liquidity by watching out for the Loan-to-Deposit Ratio. They must also check their loan quality to keep non-performing loans manageable. Nonetheless, higher interest rates may raise yields on interest-bearing deposits.
Customers may open money market accounts and high-interest checking accounts while ensuring the bank can sustain its business, generate higher investment yields, and cover deposits.
Money Market Accounts vs. High-Interest Checking Accounts
Elevated Fed rates can be discouraging for borrowers and investors. The opposite is true for banking clients. Higher rates lead to higher yields on interest-bearing deposits. And even after the Silicon Valley Bank collapse, deposit inflows have kept increasing. Indeed, interest rate hikes in 2022 raised the popularity of money market accounts (MMA) and high-interest savings and checking accounts.
Money market accounts (MMAs) are short-term interest-bearing accounts delivering rates or yields higher than regular savings accounts. These are mutual funds offered by investment firms, brokerages, and other financial services providers.
Corporations strategically pool financial resources from a diverse group of investors, meticulously selecting short-term securities as their investment avenue. Although they are investments, they act like demand deposit cash accounts.
As such, they are close to savings accounts but with some of the benefits of a checking account. These include higher interest rates and easier access to money. They are also FDIC-insured if deposited at a bank, unlike money market funds.
These savings-like accounts also require a higher minimum deposit to generate the highest yield. But on average, a money market account under $100,000 in the US earns 0.09% vs. 0.06% for a traditional savings account.
Some money market accounts can offer an annual percentage yield (APY) ranging from 1.3% to 1.51%. But top money market account rates can exceed 5%. So customers may put money into larger accounts and long-term certificates of deposits (CDs) to enjoy higher APYs.
On the other hand, high-interest or high-yield checking accounts contain all the features of traditional checking accounts. They offer a debit card, online account management, and limitless checks. They also have perks, such as free overdraft protection, reward points, and waiving of maintenance fees.
But like an MMA, a high-interest checking account may be more demanding than a traditional savings and checking account as it requires a direct deposit and signing up for electronic statements. Also, customers must meet a minimum number of monthly transactions.
For instance, they must use their debit cards about ten times every month. Other accounts may specify a minimum amount spent using debit cards. Sometimes, it requires at least one online bill pay per statement period.
Thankfully, high-interest checking accounts have promising interest rates. On average, yields for accounts below $100,000 are also higher than the 0.06% national average for traditional savings. Some high-interest checking accounts also offer rates of above 5%.
Given all these, average MMAs generate higher yields than average high-interest checking accounts. But when you concentrate on the best money market accounts and best high-interest checking accounts, their difference becomes narrower.
In fact, the latter pay a little higher yields than MMAs and even the best high-interest savings accounts. They are especially higher than the other two types in a low-interest market environment.
High-interest checking accounts and MMAs are different, so customers may get both or neither. But the tiebreaker lies in convenience with withdrawals and other transactions. High-interest checking accounts have unlimited withdrawal advantages but require a high transaction volume.
Meanwhile, MMAs impose withdrawal and other transaction limits. Thus, MMAs can be suitable for those who prefer those similar to traditional savings accounts. However, high-interest checking accounts are better for transactional accounts to pay monthly bills and daily purchases.
What To Look for in a High-Interest Checking Account Before Getting One
A high-interest checking account has a higher yield or interest rate than a traditional one. For many, it serves to cover monthly bills and daily expenses. With its specific requirements, customers can enjoy its perks as long as they keep a high balance and use it as often as possible. However, one must determine the specific features a checking account must have before opening.
Minimum balance requirements and other fees
Both traditional and high-yield checking accounts require a minimum balance to avoid fees. Otherwise, customers will incur a maintenance fee of up to $15. So before opening an account, you must have stable fund sources to meet this requirement to waive the fee.
But there’s more to it than meets the eye because this is just the start. Customers must look beyond maintenance and monthly fees to determine whether transaction charges are reasonable. Other fees include card replacement fees, overdraft fees, paper statement fees, and account closure fees. The total amount may reach $35.
Even so, note that some of these fees are avoidable. For instance, banks allow customers to get e-statements instead of paper statements.
Insurance
Customers must prioritize financial protection over rewards. To that end, they must verify that the firm, bank, or credit union provides insurance on their deposits.
It can come from the National Credit Union Administration (NCUA). It can also be provided by the Federal Deposit Insurance Corporation (FDIC). Both provide a standard amount of $250,000 per depositor per bank. This allows customers to be reimbursed up to their balance and the legal limit if their bank or credit union fails. Banks are also at risk of illiquidity and runs. Take the Silicon Valley Bank as an example.
ATM network
High-interest checking accounts offer easy access to funds with unlimited withdrawals and other transactions. However, customers may get charged if they use ATMs not affiliated with the bank.
They may have to pay banking fees from their banks and surcharges from the ATM owner if they use out-of-network ATMs. In a study, the average cost can reach $4.7, comprised of the average out-of-network ATM fee of $1.58 and the average surcharge of $3.15. This figure is the highest since 2019. So customers may opt for checking accounts with access to large and no-fee ATM networks.
Mobile banking and online bills
As the digital revolution peaks, digital banking becomes a convenient way for personal and business transactions. By just logging in to the bank’s website or mobile app, customers can view their accounts and make transactions anytime and anywhere they want. Customers can open a checking account online with no deposit.
Banking apps can also offer mobile check deposits. Customers may take photos of checks using their phone’s camera and make deposits into their checking account. Aside from balance checking and virtual depositing, customers can also view their transaction history, perform automated savings rules, and make online transfers.
Additionally, digital banking allows customers to pay bills online. This is an essential feature since online bill payments at least once a month are part of the requirements for higher deposit yields.
Even better, customers can pay bills directly from their accounts instead of visiting separate websites. You can set up recurring bill payments to simplify transactions. That way, customers won’t have to track due dates for all their bills.
Rewards
Although high-interest checking accounts have stable and high yields, customers should still make a comparison across various banks, firms, and credit unions. That way, they can find the optimal choice with the most reasonable fees and enticing APYs. Other rewards, such as cashback and discounts, are also essential attributes.
Pros and Cons of High-Interest Checking Accounts
At this point, we already know a lot about the benefits and requirements of having a high-interest checking account. But we still have to weigh the pros and cons of this. The table below will summarize this.
| High-Interest Checking Accounts | |
| Pros | Cons |
| Easy Access
Customers can access their funds anytime and anywhere via paper checks, debit cards, electronic payments, and mobile banking. Unlike savings accounts and MMAs, high-interest checking accounts don’t impose withdrawal and other transaction limits. |
High Balance Requirements
Maintenance or insufficient fund charges only show up when customers don’t maintain a certain amount in their account. However, the problem may arise from a high balance requirement. It may be higher than a traditional checking and savings account. |
| Higher Interest
Large high-interest checking accounts outperform the top MMAs in APYs. They have higher yields than high-yield savings accounts and MMAs when interest rates are low. |
Minimum Transactions
High-interest checking accounts require a certain number of deposits and transactions every month. |
| Perks
High-interest checking accounts provide access to online banking, overdraft protection, automatic payroll and monthly bill deductions, discounts, and cashback. |
Availability
Smaller providers are not available at every institution and ATMs. Customers may incur higher service fees. |
| Maintenance Fees
Maintenance fees only appear if a customer fails to meet the minimum balance requirement. |
Not Good For Savings
Since high-interest checking accounts impose a minimum number of transactions, it can be challenging to build savings and emergency funds. It better serves monthly bill payments and daily purchases. |
| Security
The FDIC and NCUA mostly back high-interest checking accounts. |
|
Unlock the Power of High-Interest Checking
After weighing the pros and cons, the question now is whether or not it’s good to open a high-interest checking account.
Remember that in every financial account, customers may experience a trade-off. There are risks and rewards of opening high-interest checking accounts. Whether for business or personal use, opening a high-interest checking account can be rewarding in the long run. Its APYs are also attractive in both high and low-interest environments.
If you want a transactional account for daily purchases and monthly bills, a high-yield checking account is an excellent choice. That way, it’s easy to meet the minimum number of transactions and online bill payments. It will help you enjoy the high deposit yields it promises.
