What Is the Definition of Interest Bearing Bank Accounts?

Interest-bearing bank accounts are accounts at banks that pay interest to the account holder. When an individual deposits money at a bank, the bank is essentially borrowing money. Just like any other loan, the bank pays interest on the money saved. Banks can then lend money to other people at higher interest rates to earn profit.

Function

Interest bearing accounts function as a way for banks to attract capital and gain profits. For instance, if one bank offers interest rates of 2% on standard savings accounts and a bank across the street offers 3%, few savers are likely to open accounts at the bank with the lower rate. If the bank with the lower rate raised its rate above 3% however, it would likely attract more customers.

Types

Traditional savings accounts are a typical type of interest-bearing bank account, although any type of financial account at a bank that pays interest can be considered an interest-bearing account. For instance, some checking accounts pay interest to the account holder. Checking account interest rates are usually lower than savings account rates. Certificate of deposit (CD) accounts are another type of interest-bearing account where the saver commits funds for a predetermined amount of time in exchange for a higher interest rate.

Benefits

Interest-bearing bank accounts can be beneficial to individuals since they provide a safe place for money that earn a return. Banks that are members of the Federal Deposit Insurance Corporation (FDIC) have insurance for savings account deposits up to $250,000, meaning lost funds will be paid for by the government if the bank is unable to pay for some reason. High interest savings accounts and CDs can earn respectable interest rates with almost no risk.

Drawbacks

Interest-bearing accounts typically have less potential upside than other investments. Risky investments like stocks and mutual funds can potentially earn 10% or more in short periods of time. While equity investments can go down in value, on average stocks are often considered a better long term investment than keeping money in interest-bearing accounts at banks. Interest-bearing accounts may also be subject to various fees and limitations.

Considerations

Many banks offer online savings accounts that may pay higher interest than typical savings accounts at brick and mortar banks. Online accounts can be linked to checking accounts, making it easy to transfer funds between the two.

References

• CNN: Take an interest in interest
• CNN: Basics of Banking
• US Treasury: Answers About Interest-Bearing Accounts