What is a High Yield Checking Account?

A high yield checking account is a bank account that pays higher rates of interest while still allowing regular access and transactions. Because of US banking regulations, a high yield checking account is often not technically a checking account. In practice, this distinction may have few noticeable effects.

Strictly speaking, a checking account, namely one where the holder can withdraw cash at any time without notice, cannot pay interest. Banks that are not members of the Federal Reserve system are exempt from the regulation. There are several ways by which banks in the system can work around the regulation.

One option is to offer a negotiable order of withdrawal, or NOW, account. This allows holders to write a check-like document known as a negotiable order of withdrawal to another person, who can then claim they money from their account. Although this works exactly the same as a check, it is legally considered different and thus exempt from the ban on the account paying interest. The technicality is so slender that such accounts are still widely referred to as checking accounts.

Another option is the money market account. This invests the money from deposits in government and business securities and then pays the returns as interest. Account holders are allowed to write checks, but the account is legally classed as a savings account, which means the holder is restricted to six withdrawal transactions each month.

The phrase high yield checking account does not have a specific legal meaning. Technically, any type of NOW or money market account could be described as such, as long as the bank thinks it would be credible given the interest rate paid on accounts. The phrase is most widely used for accounts that are specifically designed to pay a high rate of interest up to a particular account balance. The interest rate then drops for any balance above this limit. The idea is to make the account attractive enough to win customers without incurring excessive interest costs for those with high balances.

Some banks that offer high yield checking accounts market them as a reward account. Usually these accounts pay a particularly high level of interest but come with specific conditions. These can include making a minimum number of transactions each month, paying in at least one payment of a certain amount each month, or even checking the account balance online at least once a month. The idea is usually that the conditions are so restrictive that account holders find it easier to do all their banking business through this account, rather than simply use it as a way to earn high levels of interest without restrictions on withdrawals.