There are many options to earn interest on your money.
Two of our favorites here at The Daily Dime are:
Interest-Earning Bank Accounts and Cash-Back Credit Cards
Below, we will review the details of each and offer options to
earn interest or receive cash back on your credit card purchases.
Cash-back credit cards and interest-paying bank accounts are two financial tools that can help consumers manage their money more effectively. Here’s a breakdown of each:
A cash-back credit card is a type of credit card that rewards users with a percentage of their spending back in cash rewards. Here’s how it typically works:
1. Cash Back Percentage: These cards offer a certain percentage of cash back on eligible purchases. Common percentages range from 1% to 5%, depending on the card and the spending category.
2. Categories and Limits: Some cards offer higher cash back percentages in specific spending categories, such as groceries, gas, dining, or travel. There may be limits on how much cash back you can earn in each category or overall.
3. Redemption Options: Cash back rewards can usually be redeemed as statement credits, direct deposits into a bank account, gift cards, or sometimes even as merchandise.
4. Annual Fees and Interest Rates: Many cash-back credit cards come with annual fees, although some are fee-free. It’s important to consider the annual fee against the potential cash-back rewards to ensure it’s worthwhile. Additionally, it is crucial to pay off the credit card balance in full each month to avoid high-interest charges, as interest rates on credit cards tend to be relatively high.
5. Credit Score Impact: Opening a new credit card can temporarily lower your credit score due to the hard inquiry and decreased average age of accounts. However, responsible use, such as making on-time payments and keeping credit utilization low, can have a positive long-term impact on your credit score.
Interest-Paying Bank Account:
An interest-paying bank account, also known as a high-yield savings account or a money market account, allows account holders to earn interest on their deposits. Here’s what you need to know about these accounts:
1. Interest Rates: These accounts typically offer higher interest rates compared to traditional savings accounts. The interest rate may be variable and can fluctuate over time based on market conditions.
2. FDIC Insurance: Most interest-paying bank accounts are FDIC-insured up to the maximum allowed by law, currently $250,000 per depositor, per insured bank. This insurance protects your deposits in case the bank fails.
3. Minimum Balance Requirements: Some accounts may require a minimum balance to open or earn the advertised interest rate. Be sure to check the requirements before opening an account.
4. Accessibility: While these accounts offer the opportunity to earn interest on your savings, they may have restrictions on withdrawals or transfers to ensure the bank can maintain liquidity. There may be limits on the number of transactions you can make per month without incurring fees.
5. Inflation and Tax Considerations: It’s important to consider the impact of inflation and taxes on the purchasing power of your savings and interest earnings. While interest-paying accounts can help your savings grow, inflation can erode the real value of your money over time.
In summary, cash-back credit cards can provide valuable rewards for your everyday spending, but it’s essential to pay off the balance in full each month to avoid high interest charges.
Interest-paying bank accounts offer the opportunity to earn interest on your savings but be mindful of any fees, minimum balance requirements, and withdrawal restrictions. Both tools can be valuable components of a comprehensive financial strategy.