High-Interest Savings Accounts: What Qualifies and How Much Interest Really Matters

Introduction to High-Interest Savings Accounts

The terms "high-interest savings account," "high-yield savings account," and "money market savings account" are marketing tools used by financial institutions. In the United States, there are no legal requirements to use these terms, and they are essentially a form of puffery, meaning they are subjective descriptions meant to catch attention. This article will explore the actual interest rates that qualify as high-interest savings accounts and what these terms really mean for consumers.

Understanding Interest Rates

In today's financial landscape, banks often market interest-bearing checking accounts with interest rates as low as 0.01% (one-one hundredth of one percent). Describing an interest rate of 0.01% as interest is much like a store selling items for $0.99 and calling itself the "99 Cent Store." However, this comparison is misleading because it understates the true nature of these low rates.

For context, an interest rate of 0.01% on a balance of $10,000 would yield only $1 in a year. This is significantly less than what could be considered a reasonable interest rate. In fact, the 99 Cent Store example is more favorable because the store was off by only one cent, whereas a bank with a rate of 0.01% is off by $99 compared to the expected rate.

Defining High-Interest Savings Accounts

High-interest savings accounts, or high-yield savings accounts, typically offer interest rates much higher than the average savings account. For an account to truly be considered high-interest, it needs to provide significantly more than the 0.01% rate mentioned by banks.

Typically, a savings account that pays at least 2% annually can be considered a high-interest savings account. This rate is significantly higher than the average bank's basic savings rate, which is often just a fraction of a percent.

As of April 2019, several savings accounts were paying 2.5% or nearly that amount, as listed by various financial institutions. These high-interest rates can provide substantial returns and are much more aligned with typical definitions of a high-interest savings account.

Types of High-Interest Savings Accounts

There are a few types of high-interest savings accounts, including:

1. Limited High-Interest Accounts

Some high-interest savings accounts may be limited to a small amount of funds or have minimum deposit requirements. These accounts are often designed to attract customers looking for better returns on their savings.

2. Rewards High-Interest Accounts

Other high-interest savings accounts are linked to credit card rewards or other financial products. To qualify for these accounts, account holders need to meet certain requirements, such as making active card transactions or maintaining a minimum balance.

Example: Consumers Credit Union High Interest Checking

For instance, Consumers Credit Union offers a high-interest checking account (also known as high-yield savings account) that provides a higher interest rate. This account is designed to reward customers who consistently maintain a balance, and it pays a substantially higher rate compared to the average savings account.

Conclusion

In summary, high-interest savings accounts are those that provide a significantly higher rate of return than traditional savings accounts. While financial institutions may use marketing terms like "high-interest" or "high-yield," the actual interest rates can vary widely. It's crucial for consumers to review the terms and conditions of these accounts to ensure they meet their financial goals. By understanding the differences and the actual rates, consumers can make informed decisions and potentially earn more on their savings.