What is a Tiered-Rate Account
A tiered-rate account is a checking or savings account that pays interest at increasingly higher rates as the account balance increases. Each tier consists of a range of account balances and interest rates earned by the customer if his or her balance falls within that range.
The first tier, for example, may include balances of $2,500 to $10,000 and pay 1% interest; the second tier may include balances of $10,001 to $17,500 and pay 1.15% interest; and the third tier may include balances of $17,501 and up and pay 1.3% interest.
BREAKING DOWN Tiered-Rate Account
A tiered-rate account may require a minimum balance to open an account and a minimum average daily balance to earn a particular tier’s interest payment. Banks are free to choose the number of tiers they offer and the interest rate they will pay for each tier. Tiered-rate accounts are an attempt by banks and other depository institutions to make checking and savings accounts more competitive with other types of accounts, such as brokerage accounts, that offer better rates of return. By offering higher interest rates, banks provide savers with an incentive to keep their funds with a bank.
Attracting and growing savings and checking balances is key to any bank’s business model. By depositing funds in a bank account, a person is essentially providing the funds for a bank’s primary business, which is making loans. A bank charges borrowers an interest rate that is higher than what it pays depositors and it keeps the difference. Banks attempt to maximize this difference and thereby increase their net interest margin, a measure of profitability.