How can accounts accrue interest? Interest is what financial institutions pay as a fee for the use of your money. It is discussed by using the annual percentage rate or APR. Most regular types of checking...
Most regular types of checking accounts do not accrue interest. Only accounts that are designed to earn interest will accrue it. Interest is what financial institutions pay as a fee for the use of your money. It is discussed by using the annual percentage rate or APR. The APR is itself a percentage that comes from the amount financed, charges and terms. The type of account modifies the equation. Do not forget to find out the annual percentage yield (APY) as well. This percentage reflects the total interest earned by the account, assuming it is held for one year.
"Banks calculate the amount of interest owed to account owners on a periodic basis, such as daily, and credit the interest to the account also on a periodic basis, such as monthly," says Sharon Lee, the Executive Vice President and Director of Client Services of American National Bank, who has thirty years in the banking industry. "The accrual of interest is the term accountants and banks use to describe the accumulation of interest in the period before it is actually paid or credited to the account," said Lee.
Some accounts, including savings and money markets have compound interest. Compounded interest occurs when the next interest payment is calculated with the principle plus the prior earned interest. This is the trick to growing your savings for future purchases or retirement. Use a Certificate of Deposit or CD to earn a good rate of interest on money that you do not need quickly. CDs earn compound interest over its life. Remember that you cannot access the money inside a CD typically without paying penalties that can erase any profit you might have made. Sometimes the penalties can actually take away part of your principle.
Some types of savings accounts are tiered. Money market accounts can be a good example of a tiered account. The interest that is paid on the balance in the account will vary up or down based on the actual amount. The more money in the account, the higher the rate of interest it will earn. Money market accounts are a better choice if you need to access your money quickly. There are some accounts that are performance indexed. A large amount of money is needed to open and is liquid like a money market. The interest earned is compounded and based on the 90-day Treasury bill.
Some savings and checking accounts offered by financial institutions may use a variable rate of interest rather than fixed. The variable rate changes by adding the index rate to the previous margin. The index rate most often used as a base is the prime rate, which is published in the Wall Street Journal. It is an average of the prime rates used by the biggest banks.
Check with banks that only have an online presence. These banks do not have to maintain brick and mortar stores, which means they have lower overhead. Because of this, online banks can often offer higher interest rates on the different accounts. There may be other fees though, so read the fine print carefully.
