Why different interest rates for checking and savings?
I have recently become financially independent (21 yo student in US) and I am starting an independent bank account. I noticed that the interest rates on savings accounts are significantly higher than those of checking accounts. Why is this the case?
What stops me from keeping all my money in a savings account then transferring a monthly allowance to my checking account after interest is generated at the beginning of every month?
And why don't banks allow for debit cards to be connected directly to savings accounts, they seem like basically the same thing from the bank's point of view.
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I noticed that the interest rates on savings accounts are significantly higher than those of checking accounts. Why is this the case?
Balances in savings accounts tend to be maintained for much longer periods of time (both by choice, and by restrictions on transactions), so the bank doesn't need to keep as large a reserve and can loan out more of the money, for example as mortgages.
See en.wikipedia.org/wiki/Fractional-reserve_banking
What stops me from keeping all my money in a savings account then transferring a monthly allowance to my checking account after interest is generated at the beginning of every month?
Nothing. Keeping your checking account balance to just a bit more than your planned spending is a good idea for a number of reasons.
And why don't banks allow for debit cards to be connected directly to savings accounts, they seem like basically the same thing from the bank's point of view.
First, that would be pretty useless, since debit card transactions would be restricted under Regulation D (limit of 6 withdrawals from a savings account per statement cycle).
See en.wikipedia.org/wiki/Regulation_D_(FRB)
Second, that would put your entire savings account balance at risk to debit card fraud, instead of the (typically much smaller) amount in your checking account.
When you choose a checking and savings account, look for a bank that offers both with no or very low fee for overdraft protection (automatic transfer from savings to checking to prevent the checking account from going negative which is called "overdraft")
It is worthwhile to note that there are some "premium checking" accounts, with velocity requirements (you must make a certain number of transactions per month), that actually pay even more interest than savings accounts. If you can meet the velocity requirement, these are better than savings accounts (higher interest, no limit on number of transactions) except that the exposure to fraud is also higher.
You are typically restricted by the number of withdrawals you can make from a savings account per statement, which is also why you don't have a debit card for it. My bank has this note on my savings account:
Federal law limits certain types of telephone, check and electronic transfers and withdrawals from Money Market and Online Savings accounts to 6 per statement cycle. This includes things like point-of-sale transactions, Online and Mobile Banking transfers, our Overdraft Transfer Service and transfers from your Online Savings and Money Market accounts. If you go over this limit, we charge for each of these transactions after the initial 6. If you see a negative number on your account details page, you've exceeded 6 transactions in this statement cycle. If you exceed this limit on more than an occasional basis, we're required to close your account.
This way, the bank can invest a portion of the money they have received from savings since they know this is where people keep their money long-term and not needing to keep it all readily available, and they can pass some of those earnings as interest for the account.
In a checking account, the money must be more readily available by the bank for it to be spent frequently, which is also more costly for the bank to maintain.
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