Money Market vs. High-Interest Checking Account: An Overview

With near-zero interest rates have been the norm for some time, you have probably been conditioned to accept rates on your liquid cash that barely register on your account statements. According to bankrate.com, the average money market account (MMA) rate in the nation was 0.20%, when we checked on August 29, 2018, which would earn $20 on a $10,000 deposit after the first year. You can find better rates by shopping and comparing. If you’re willing to do your banking in the Internet cloud, you might find MMA rates topping 2.0%.

However, there’s another option that can have even better rates: high-interest checking accounts. These can pay in the 3% to 5% range and are usually found at smaller community banks, credit unions, or online banks. It is easy to become captivated by the comparatively alluring rates they offer, but, with all the caveats involved, they may not be for everyone.

Key Takeaways

  • Money market accounts are interest-bearing accounts that generate a variable rate that's typically higher than traditional savings accounts.
  • Money market accounts have a limited check writing and a maximum of six transfers and electronic payments per month.
  • High-interest checking accounts can pay higher interest rates than typical MMAs.
  • However, high-interest checking accounts come with conditions, which can include a high balance requirement, direct deposit, and a minimum number of monthly transactions.

Money Market Account

Money market accounts are short-term interest-bearing accounts that generate a variable yield while preserving principal. MMAs tend to deliver interest rates that are higher than those for savings accounts, but they often call for a higher minimum deposit. Some require a minimum balance to receive the highest rate. The interest rates on MMAs are variable, which means they rise and fall with interest rates in the overall market. 

One of the drawbacks of money market accounts versus checking accounts is that MMAs have limited check writing and balance transfer privileges. The Federal Reserve Regulation D limits depositors to a monthly total of six transfers and electronic payments. If the transfer limit is breached, the bank will likely charge a fine, and if the transaction volume doesn't decrease thereafter, the account will likely be converted to a checking account.

Money market bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC) while MMAs opened in credit unions are insured by the National Credit Union Administration (NCUA). Both agencies provide insurance up to $250,000 per depositor per account.

In short, MMAs might be a better option, depending on the rate, if the goal is to park some cash for a short period, or if you don’t want to actively manage your savings. MMAs provide access to your money when you need it, pay a higher rate than savings accounts while requiring a minimum amount of effort on your part.

High-Interest Checking Account

High-interest checking accounts have all the features that come with traditional checking accounts. Many of the accounts offer unlimited checks, a debit card, online account management, and perks such as rewards points and free overdraft protection. Many banks will waive the monthly maintenance fee if the minimum daily balance is maintained.

The rates for high-interest checking accounts are usually capped, meaning that the higher interest rate is paid only up to a specific amount of money on deposit. Most accounts are capped at $25,000, but the caps can go as low as $1,000. Deposits that exceed the cap earn a much lower rate, as low as 0.1%. However, many high-interest checking accounts pay a better rate than money market accounts.

You have to meet a number of conditions to earn a higher rate, which can include having a direct deposit into the account and signing up for electronic statements. Many accounts require ten monthly transactions, and if you make fewer than ten, you forfeit the higher interest rate for the statement period. Also, high-interest checking accounts sometimes require at least one bill pay or transfer from the account per statement period. Bill pay is an online payment system.

None of the above-mentioned requirements are insurmountable. However, meeting them means that you have to actively manage the account. Most people are used to a more passive approach to account management.

If you’re willing to manage your account actively, a high-interest checking account can generate significantly higher interest earnings than a typical MMA. If in the normal course of a month, you expect to make the required number of debit transactions and have at least one bill you can set up on automatic bill payment; a high-interest checking account shouldn’t be much to manage.

One of the drawbacks of high-interest checking accounts is the cap. To optimize your interest rate earnings, you need to make sure that the amount on deposit doesn’t exceed the cap since you won't earn a higher rate for going over it.

However, depositors will likely earn more with the checking account if they can meet the requirements. For example, a $10,000 deposit in a high-interest checking account earning 2.5% interest equates to roughly $240 per year interest. On the other hand, a $10,000 deposit in a money market account paying a 0.20% interest rate equates to $20 per year in interest.

Both high-interest checking accounts and money market accounts can earn you more in interest than a traditional savings account. Also, both accounts still give you access to your money when you need it. The right account for you largely depends on the number of monthly banking transactions and whether you could meet the minimum requirements for each account.