How to maximize interest rates in checking, savings and CDs

Americans are keeping more of their savings in deposit accounts, with the latest federal data showing that total bank deposits increased 6.8% last year to $11.6 trillion. 

Deposit accounts offer safety, which has been attractive since the 2008 financial crisis, and for many holders of cash, safety has been much more important than interest rates. But even though we continue to be in a low interest rate environment, it doesn't take much work to earn significantly more interest than the near-zero percent that average bank accounts have been earning the past decade. Here are four tips to maximize your interest rates in checking, savings and CDs.

High-yield reward checking accounts

Replace a standard checking account with a high-yield reward checking account to earn a higher interest rate. Each of the last 10 years, high-yield reward checking accounts have grown in popularity. There are now almost 1,000 of these checking accounts being offered – mostly by community banks and credit unions – throughout the nation. 

Most high-yield reward checking accounts are free with no monthly maintenance fee regardless of balance or account activity. Qualifying for the high yield requires activity that's common for a primary checking account, including making debit card purchases and establishing direct deposit. Customers who meet these requirements are rewarded with a yield of up to 5%. The balance that earns this high rate is typically limited to between $10,000 and $25,000.

Internet savings accounts

Replace a savings account at a brick-and-mortar bank with an internet savings account. These accounts offer interest rates more than seven times higher than the average rate of old-school accounts. Also, internet savings accounts have been responding faster to Federal Reserve rate hikes.

Internet savings accounts are useful for those who may not be able to switch to a high-yield reward checking account or who have large savings that exceed the reward checking balance caps. Many internet banks make it easy to link a checking account from another bank with the internet savings account. Once linked, it's easy to transfer money between the accounts.

Important features for internet savings accounts

Avoid internet savings accounts with minimum balance requirements or weak electronic funds transfer capabilities. If depositors need money for an emergency, they don't want to worry about having to maintain a minimum balance to avoid a fee. Also, they don't want to wait multiple days for a slow electronic funds transfer service to move money into the checking account.

CDs with small early-withdrawal penalties

CDs with five-year terms and small early-withdrawal penalties offer the best alternative to internet savings accounts. Current top five-year CDs offer interest rates more than a percentage point higher than the best savings accounts. Unlike savings accounts, CDs have early-withdrawal penalties if the money is accessed before maturity. Choosing CDs with small penalties can minimize the downside of early withdrawals. For five-year terms, small withdrawal penalties are six months' interest or less. If it's unlikely that you'll need the money before one year, this strategy of using five-year CDs with small withdrawal penalties makes the most sense.

The bottom line? Interest rates may be rising, but based on the Fed and the economy, the rise will likely continue to be gradual. That shouldn't deter Americans from trying to earn more on the cash they need for emergency funds or short-term goals. With just a little work and knowledge, it's easy to earn much more interest.

Ken Tumin is founder and editor of DepositAccounts.com, which has been tracking and rating the savings, CD and checking account offerings of banks and credit unions for more than a decade.