How do you calculate interest on a checking account? Many people don't even bother, thinking it's not enough to worry about. But if you're interested in accounting for every dollar in your finances, the issue is worth examining.
Simple interest vs. compounding interest
Simple interest is simple to calculate. If you deposited $100 in a checking account that pays 3 percent interest annually, at the end of the year (assuming your balance stayed steady), you will have $103 dollars -- your original balance plus $3 interest paid by the bank.
And then you have compounding interest, or "interest on interest." In this case, interest is calculated periodically, revising the balance upwards, and then interest is paid on the new balance. The calculation depends on when the interest is credited to the account.
There are a variety of tools available to quickly make this calculation, including a compound interest calculator. But the bottom line is important to internalize, no matter what the actual figures are: Compounding interest adds up quicker than simple interest, whether you're paying it (mortgage) or it's being paid to you (checking or savings account).
Checking account interest
It depends on the bank and the account terms, but checking account interest is usually compounding interest that is calculated daily and credited at the end of the billing cycle. This means the bank pays the interest at the end of the month, but calculates the interest on a daily basis.
Interest rates vary according to many factors, including market conditions, account type and the financial institution. Because banks generally want to attract customers with more to deposit, carrying a higher balance may earn you a higher rate.
Not that big a deal?
Some will claim that if you're interested in learning how to calculate interest on a checking account, you may also be in the market for other types of accounts. There is some logic to this argument. Other financial products, such as savings or money market accounts, typically pay higher interest than checking accounts, which are meant more for paying your regular expenses than generating interest income.
That said, there exist some high-yield checking accounts that pay interest equal to or even better than the typical savings or money market account. Many of these accounts exist at online banks, which frequently offer higher rates than most brick-and-mortar banks.
If you're interested in getting the most from your checking account, its interest is one component to review. But to learn more about these types of accounts, visit MoneyRates.com's checking accounts page for more information on current terms and offers.