High Interest Checking Account for a Bad Economy

Many people are trying their best to save their cash during these trying economic times. One way of generating a little more income is to open and maintain a high interest checking account. The current interest rates for a high interest checking account varies between .5%-1.75% which is worse than the 3% annual average rate of inflation. Although this economic downturn is not permanent, it is important to understand why interest rates are at historic lows and capping the high interest rate currently available on checking accounts.

The Federal Government is constantly adjusting short-term interest rates to help maintain balance in the economy. If it looks like there is a spending slow-down from business and consumers, the Fed will  lower the interest rate that banks use when conducting business with each other. With that rate lowered, consumers and businesses can benefit from borrowing at lower interest rates as well, and the hope is that with the reduced cost of borrowing money, spending will increase and jolt the economy back into its proper place.

However, when the rate for borrowing money goes down, so does the potential yield on investments like a high interest checking account. The banks need to properly balance their revenue streams (the money being brought in on interest) with the amount of expenses they have (in this case, the high interest being paid on a checking account). This is all done so the bank can maintain a proper profit margin.

In general, American interest rates are at their lowest point in decades. Using a high interest checking account to mitigate the effects of the bad economy will not be an efficient tool and should not be your primary investment choice. However, for those who often have large sums of money sitting in their checking account, a high interest checking account can provide you with a bit of revenue where you normally did not anticipate any.

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These articles are written by the in-house GOBankingRates team.