How Interest Works on a Money Market Account

Financial institutions base money market account interest rates, in part, on the interest rates charged for loans that make use of your money. The bank or credit union pays a larger amount of interest than a standard savings account as an incentive to get people to open money market accounts, giving them more money on hand to use for loan products or investments. They make a profit on the difference between your interest rate and the rate they're receiving from the loan, fund, stocks or bonds in which they invested the money.

Many banks and credit unions compound interest of money market accounts daily, to account for new deposits. As more interest is added to your money, the amount you earn from interest will gradually increase. Money market accounts use compounded interest, letting you earn interest on both the money you've deposited and the interest previously added to your account.

Money market accounts typically pay interest either on a monthly or quarterly basis. The financial institution pays all of the interest due at the payment time in one lump sum, and then includes it in the balance when interest begins compounding for the next payment cycle. Interest that pays quarterly is typically paid according to the bank or credit union's fiscal year, instead of quarters based on the date you opened the account.

Money market accounts typically don't have fixed interest rates, but instead base the rate on the interest or profit made from the loans or investments for which the bank or credit union used the money. Interest rates may also increase according to the importance of money market accounts to the specific financial institution; higher rates result in more people opening accounts at the bank or credit union, so financial institutions often use rate increases as a means of raising more money market capital.