What is an Earnings Credit Rate?

Sometimes referred to as an earnings allowance rate, an earnings credit rate is a type of interest rate that is used to determine the amount of bank service charges that are applied to the currently open business accounts serviced by that bank. The idea behind the rate is to identify the amount of expenses that are charged for the bank services used by the depositor, and how much of those expenses are offset by the balances that the depositor maintains in his or her account. While the earnings credit rate is usually calculated on a daily or monthly basis, it is often presented as an annual rate, based on historical data. In the United States, the rate is often guided by the current Treasury bill rate.

The idea behind the earnings credit rate is to identify which services are being used by the customer, and apply charges for those services only. This creates a situation where the actual amount of bank fees paid by customers is limited, based on their usage. Applying the earnings credit rate also encourages customers to maintain a larger idle balance in their accounts, since the bank fees are lower for larger balances and deposits.

In most nations, banks and similar financial institutions have considerable leeway in the creation of an earnings allowance structure. As long as that structure complies with the banking regulations that apply to the area where the bank is in operation, the allowance can be set at levels that may or may not be competitive with other banks. Often, the use of the earnings credit rate helps to move those allowances into a more competitive direction, and may be used as a marketing tool to demonstrate to prospective how much they save in the way of interest rates by maintaining a certain balance in their accounts, or average a certain level of deposits during a given accounting period.

For the customer, it is important to review the schedule of charges for various services and fees, as they appear on the monthly account statement. Doing so helps to ensure that charges for services that were not used during the period are not applied in error, a situation that leads to higher bank fees. While most banks have a system of checks and balances that prevents the application of fees in error, the potential still remains. Typically, when a customer reports that a portion of the charges applied were for services not used, the charges are reversed and the balance in the account is adjusted accordingly.