Checking Account Interest Rates – Going Up Anytime Soon?

Interest rates on mortgages are at a six month high, and may rise further. But checking account interest rates remain low. When will that change and why?
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man receiving money at the cash department window in the bank

You wouldn’t know it by watching the news, but mortgage rates are not the only interest rates that matter. Another, oft-ignored interest rate affects a massive group of people: the interest rate banks pay on checking account deposits.

Estimates are that upwards of 83 million Americans have a checking account. Additionally, the current recession seems to have increased this reliance on checking accounts, with a recent study showing that 43 percent of respondents had changed their spending habits to rely more on debit cards than credit cards.

All this begs the questions: will checking account interest rates go up, when, and why?

Checking Accounts Much-Coveted by Banks. Know That and Use That

Checking accounts are hugely important to banks. Other financial products become saleable to depositors who are pleased with the convenience and interest rate associated with their checking account.

From your perspective, as a depositor, it’s important to understand the power this affords you as a consumer. Banks want you to open a checking account at their institution, and will do many things to entice you. This may mean offering free checking or loyalty rewards, or it may mean offering a higher interest rate.

If you have en established relationship with a bank, consider requesting an increase in the interest rate paid on your checking account. If it’s not forthcoming, look for another bank that will accomodate your wishes.

The best indication that checking account rates are headed up may be that customers are demanding that they do.

Checking Account Interest Rates Heavily Affected by Bank Competition

This increased focus by banks on checking account interest rates is already happening, as some banks are winning customers with checking account interest up to three percent–better than the average six month CD.

Note, though, that a high interest rate’s value can be severely diluted if there are fees associated with the account. So don’t fall for marketing schemes that advertise accounts that pay high interest but cost a lot to own in return.

Mortgage Rates, Checking Account Rates, and a (Possibly) Changing China

The once-vaunted theory goes:

Banks take deposits and pay interest to depositors for the purpose of making loans, such as mortgages. Therefore, as banks charge higher rates to mortgage borrowers, banks should pay higher interest to depositors.

In recent years, this theory has been shot to kingdom come–much to the dismay of deposit account rate watchers–by the incredible saving capacity of China. According to some studies, the average Chinese person saves more than 50 percent of his or her income. Much of this savings, trillions of dollars, comes to be held in U.S. deposit accounts.

Due to the law of supply and demand, U.S. banks don’t need to pay much interest on deposit accounts because their coffers are perpetually full of Chinese savings. If and when the Chinese consumer matures (i.e. wants more stuff), U.S. banks may begin paying more for deposit accounts.

Keep an eye on Chinese consumer spending, then, if you’re keeping an eye on checking account interest rates.


About Author
Andrew Freiburghouse joins as a contributor specializing in tax and personal finance topics. Over the course of seven years, Andrew Freiburghouse prepared approximately 7,000 tax returns as a junior partner at Los Angeles tax preparation firm Pronto Income Tax of California, Inc. He also represented numerous clients before the Internal Revenue Service, in one case helping to reduce a taxpayer’s IRS debt from $72,000 to $700. Andrew lives in Brooklyn, NY, and is in the process of starting up his own tax practice