We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is an Earnings Allowance?

By Toni Henthorn
Updated: Feb 04, 2024

The earnings allowance is a daily bank calculation on a customer account that credits the account for its idle funds to offset bank service charges. Although each bank may set the rate using its unique formula, the bank links the rate for the earnings allowance with the United States Treasury bill interest rate. The banks afford an account with a large balance a higher earnings allowance than an account with a minimal balance, so that large account holders pay lower bank fees. The rate at which banks credit an account, called an earnings credit rate (ECR), incorporates the earnings allowance along with the rate at which the consumer utilizes various bank services. Banks exercise considerable discretion in setting the ECR.

Business account holders must decide whether to maintain high balances in order to offset bank service charges or to use the funds to invest elsewhere. The potential advantages to paying the bank fees and using the available funds include higher yields from other investments, lowered Federal Reserve and Federal Deposit Insurance Commission fees, and the ability to write-off bank charges as a business expense, which will reduce taxes. On the other hand, if high balances are maintained, the earnings allowance credit covers bank fees, and the company does not have to budget for these fees. In addition, banks may be more amenable to loans if the loan applicant has a large account in the bank.

The Federal Open Market Committee (FOMC) sets short-term interest rates. When the committee cuts the federal interest rate to stimulate the economy, the interbank loan interest rate also falls. Because banks earn less money from account money, the earnings allowance rate and the interest rate for interest-bearing accounts also fall. On the other hand, a fall in the federal interest rates lowers adjustable rate mortgages, interest rates on other loans, and credit card interest rates. If the lower interest rates produce too much growth in the economy, inflation occurs.

Although banks credit the account holder the earnings allowance for the inert funds in his account, the best method to avoid high bank charges is to shop for the bank that provides the services needed for the lowest rate. Common bank fees include overdraft protection fees, minimum balance fees, debit card transaction fees, and automated teller transaction fees. Some banks offer checking accounts for no monthly fee, but hidden charges for extra checks or other services may offset the benefit. Alternatively, account holders may skip transaction fees by using credit cards and paying off the balance each month.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
Share
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.