Published in: Banks | Feb. 28, 2019

How Does a Money Market Account Work?

This hybrid of checking and savings features can offer you better interest rates along with a host of valuable services.

A person holds a checkbook with a pen in hand.

Image source: Getty Images

Banks have been around for centuries, but only recently have they started to innovate, with a variety of new products coming available. No longer trapped into having to choose from a checking account that wouldn't pay any interest at all and a savings account with limited access to your money, banking customers are learning the benefits of using the full range of accounts available to them.

In particular, money market accounts have become increasingly popular among banking customers. That's because they offer the same protection that any bank account enjoys, along with superior interest rates and flexibility that you won't find with most other types of accounts. Yet many people don't understand exactly how money market accounts work. Below we'll show you the ins and outs of money market accounts and how you can put them to the best possible use.

The basics of money market accounts

A money market account is a special type of bank account that incorporates some of the features of checking accounts and some of savings accounts. Initially they were designed primarily to be a savings vehicle, letting customers earn interest on their deposits while still giving them the added access to their money that money market accounts allow.

The big advantage that a money market account has over a savings account is that a money market account holder can write checks on their account. Specifically, banks give their customers the same sort of paper checks with a money market account that they offer checking account customers. You'll also typically get a debit card, which gives you ATM access or the ability to make debit transactions at merchants that accept them.

However, a money market account is more restrictive than a checking account. Because a different set of regulations applies to money market accounts than to checking accounts, banks have to impose a limit on the number of checks you can write on a money market account. Rather than the unlimited check writing that checking accounts allow, you can only write up to six checks per month in a money market account.

Why money market accounts pay better

Accepting the check-writing restrictions that money market accounts have can be worth it, though, because their interest rates are almost always much higher than what you'll get on a checking account. Many banks try to get their customers to accept checking accounts that pay no interest at all, and the average interest rate on checking accounts nationwide has been under 0.1% for years. Money market accounts and savings accounts typically jockey back and forth for position at the top of the interest-rate spectrum for short-term savings, and often, money markets will end up on top.

One reason why some banks are willing to pay higher rates on money market accounts is that they impose further restrictions on opening the account in the first place, saving it for higher-end customers. You can still get checking accounts with no minimums at many banking institutions, but it's not uncommon to see minimum balances of anywhere from $1,000 to $10,000 or more on money market accounts. If you can't reach the minimum balance requirement, you'll either not be able to open the account at all or will have to pay a pricey monthly maintenance charge to the bank.

Money market accounts get the same deposit insurance protection as other bank accounts. Traditional banks offer FDIC insurance protection of up to $250,000 per institution. Credit unions give the same protection provided through the NCUA. That stands in stark contrast to the money market mutual funds, whose misleadingly similar name confuses many people but is not a bank account and comes without any federal insurance protection.

How does finding the right money market account work?

If you like the idea of a money market account, opening one is straightforward. The following roadmap should tell you what you need to know to pick the best choice for you.

First and foremost, make sure that the bank you select won't charge you a host of fees and other costs for opening a money market account. Some customers figure that if they want the higher interest that a money market account offers, they have to be willing to accept higher fees. But in most cases, that's a mistake, because higher interest won't offset the size of the fees unless you have a large amount of money on deposit. You can find many banks that don't charge any fees on money market accounts, especially in the online banking world, so shop around and make sure you get the low- or no-cost option you want.

Second, in general, the higher the rate a bank is willing to pay on a money market account, the better the account will be. Yet it isn't always straightforward to make a comparison. If your bank offers a tiered rate based on your account balance, you'll need to decide whether you'll have enough in savings to qualify for a higher rate or will be forced to accept a lower rate. Moreover, just because a bank has the highest money market rate today doesn't mean that it always will. Rates fluctuate, and once a bank has attracted enough in deposits, it'll sometimes cut rates, counting on those who just signed up for accounts not to jump ship immediately.

Third, you'll want to pay attention to the services of each financial institution in considering whether to open a money market account there. Some people just want a place to park their money and maximize their interest rate, but others prefer having personal relationships with bank staff. In particular, if a money market account is just one aspect of your financial picture, you might prefer to go with a bank that offers the full range of financial services you anticipate needing.

Make a money market account work for you

Saving money is essential, and a money market account can offer the best of both worlds for savers. By giving you easy access to your money while paying great interest rates, finding the right money market account can deliver rewards for years.

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