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Pros and Cons of Rewards Checking Accounts

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As you have probably noticed, interest rates have plummeted over the last two years. Not long ago it was easy to find saving account interest rates in the 4-5% range, and CD rates slightly higher than that. Right now the best savings accounts are offering interest rates just under 2%, which is a far cry from what many people were used to. To take the place of the high rates that were so commonplace a year ago, many banks are now offering high interest checking accounts – some with interest rates more than double or triple what the best online savings accounts offer.

High yield checking accounts

High yield checking accounts are becoming more popular in banks across the nation, particularly the smaller regional banks that are vying for more customers and larger deposits. The biggest advantage these checking accounts offer is the high yield interest, but many of them offer other advantages such as free ATM withdrawals, no fees, and automatic bill pay.

How good are the interest rates? Rates vary of course, but a bank in our local area is currently offering a high yield savings account which is over 3 times the interest rate that some of the large online banks offer. While this seems like it would fall under the “sounds too good to be true” test, it is true – if you meet the conditions. And the terms and conditions are the biggest downfall to these types of accounts. Let’s look at some general requirements.

Common high yield checking account requirements

Banks are able to offer these high interest rates because these accounts are profitable for them when you meet the following criteria:

  • You live in the local area.
  • You sign up for direct deposit or automatic bill pay (or both).
  • You make a minimum of 10-12 debit card transactions per month.
  • You elect to receive electronic statements instead of paper statements.
  • Limit of $25,000 at highest interest rate (common limit, some banks may vary).

It’s important to meet these requirements because the bank will reduce your interest rate to the standard checking account interest rate in any month you don’t meet the requirements, usually down to 0.5% or lower. Again, this is a general representation, so be sure to read the fine print before opening an account.

Pros and cons of high yield checking accounts

Pros. A 4.5% interest rate is a stellar interest rate in this economy. Your funds will be guaranteed by the FDIC and the entire amount of your deposit, up to the limit, should be eligible for the high interest rates. Many banks also offer ATM fee reimbursements with a high yield checking account, which can save you money. (more on how to save money on ATM transactions).

Cons. Most high yield checking accounts have a long list of requirements which usually ends with a clause that states the terms can change at any time, or that they are only available to customers for a limited time. Making 10 or more debit card transactions per month can be a nuisance that many people would prefer to avoid and the $25,000 limit may also turn people off because it can be a hassle to switch your deposits from bank to bank. Finally, one slip up and you lose the higher interest rates and other benefits, potentially including the ATM fee reimbursements that you made under the impression they would be reimbursed.

How do banks make money from high yield checking accounts?

When you look at the terms and conditions you will notice a few requirements that are in the bank’s best interest – including electronic statements, automatic bill pay, direct deposit, and multiple debt card transactions. Banks spend a lot of money processing paper statements; electronic statements are a huge cost savings for them. They also spend a lot of money processing checks that are both deposited with them and are drawn against their accounts. Automatic deposit and bill pay substantially reduces the number of checks they process each year.

Banks receive a fee when you use your debit card and debit card use reduces the number of checks people write. You will also notice there is a limit on the amount of money on which they will pay the higher interest rates. That is because these accounts are only profitable up to a certain point, which is reflected in the limits.

Most importantly, the banks know how much it costs to find and retain new customers, and these deals work great to bring in new customers and create loyalty to their bank. Current customers are much more likely to use their current bank for loans, mortgages, IRAs, and other financial products that can be profitable for the banks.

Are high yield checking accounts worth it?

The answer is – it depends. From a mathematical standpoint, yes, higher interest rates are good. But the added hassles may not be worth it on a time/maintenance level. I personally haven’t opened one because I am happy with my current bank and I can’t be bothered by making a minimum of  10 debit card transactions per month and making sure I swipe the card as a credit card. I don’t have the patience to keep track of how many transactions I have made, and I don’t want to get in the habit of running to the gas station or Wal-Mart to make a series of transactions at the end of the month to ensure I continue to meet the account requirements.

On the other hand, the interest rates are very nice and I certainly understand why many people are attracted to these accounts. It’s not really that much work to maintain compliance – it’s just more than I am willing to do on a regular basis.

What are your thoughts? Do you have a high yield checking account, and is it worth it to you?


Published or updated April 12, 2013.
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{ 15 comments… read them below or add one }

1 Financial Samurai

A minimum of 10 debit card transactions a month and a $25,000 cap are definitely limiting factors for me.

If a bank were even smarter, they’d advertise 10% interest returns but cap the limit you can deposit to say $1,000. From there, banks can cross sell you to death and capture your business.

Read the fine print folks! Ryan, well done writing this. I’ve always wondered what the cons are.

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2 Phillip

“can’t be bothered by making a minimum of 10 debit card transactions per month”

Really? You have that much money that you would pass up over 4% interest? Or are you just that lazy?

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3 Ryan

Phillip, I’m neither rich, nor lazy. The difference between earning 4% on $25,000 and earning 2% on $25,000 isn’t that much over the course of a year when you factor in using rewards credit cards for cash back on your spending instead of using debit cards, which offer no rewards.

Most people will use their debit cards for all their transactions to ensure they receive the high interest rate through their checking account. My rewards credit cards offer 1-3% cash back, so I wouldn’t receive that cash back. My bank already offers free ATM transaction reimbursements, automatic bill pay, etc. So the difference for me is minimal.

I think this is a great product for some people, but it’s not that much better than what I am currently receiving with my current accounts. So it’s easier for me to avoid the hassles and have fewer financial accounts.

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4 Megastar

Yeah, a balance of $25,000 can be a deal breaker for a lot of people. If you can meet all the requirements without any trouble then you can earn a decent return on your money.

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5 Ryan

You don’t have to maintain $25,000, that is just the max amount that earns the high interest rate. You can maintain a lesser amount, but then the benefits aren’t as high.

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6 Credit Card Chaser

One strategy that you may want to try is to go through your expenses and find at least 10 monthly expenses that you have that are preferably A) Low dollar amount transactions and B) Monthly recurring expenses and that way you can just set up your rewards checking account debit card to pay for those expenses (which will be billed automatically every month by the various merchants) and then you can use a rewards credit card to pay for everything else. For example, the ideal transaction to use as one of the 10 would be something like the $4.95/month service for the Mozy computer backup service. Find 9 more transactions like that and you are all set (or even if you are someone that eats fast food a lot because you travel or whatever then you can just decide ahead of time to always use your rewards checking account debit card for every fast food purchase since the dollar amount will be so low).

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7 Ryan

Good tip for some people, but it would probably be too much work for me – I don’t have that many small recurring payments and I usually only eat out once per week. I could make it work, but I just don’t want to go through the hassle of doing it.

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8 Senan

Banks make the vast bulk of their money by lending the stuff out. So when your money is attracted into the bank by the account yield, the back office puts it to work in other ways.

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9 No Debt Plan

I guess I must be weird because I do both the rewards checking and the rewards credit card thing. (Thanks for the link, by the way.)

We try to use our debit card for the 10 smallest transactions each month, and the rest go on the credit card. It’s the best of both worlds :)

The interest on $25,000 at 4% is $83.33 per month. Compare that to the 1.3% my ING account is paying right now ($27.03 per month). That’s a win of $56.30.

Maybe that is small change to some of you, but to me that’s over $600 per year and we aren’t changing our habits much. I already used direct deposit, and now we just swipe a different card 10 times and the higher interest pays for it.

Hope that sheds some insight into why I use it! :)

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10 Jackie

I’ve been tempted by some of the high yield checking account offers, but so far I’ve decided against them because they do seem to have so many little requirements in order to make sure you earn the interest. I’d be afraid of missing a requirement and then not earning even what I can get in my online savings account.

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11 Jim Juber

Last Feb, I opened an account at a credit union and they were offering the high yield checking account. 6 months early, I had just moved to the city and wanted a local bank. I was gonna use the credit union account as an emergency fund account seperate from my everyday account that paid the bills.

In my opinion, the minimum debit card transactions almost forced me to use them as my everyday bank, along with the direct deposit. Finding 10 transactions a month was not to difficult for me: gas, groceries, lunch and dinner.

I have managed to save quite a bit in the account, around 15k. Every month, I look forward to the interest payment. Last month, it was for 38 bucks and i’m expecting to crack the $40 barrier this month. Right now, $40 pays my electric bill for the month. I assume that is what retirement will be like, living off the “funky dividends”.

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12 Ryan

Jim, the whole idea of giving people the higher rates is to create more loyal customers, especially people who will use the bank for everyday needs, including savings, loans, IRAs, and other financial accounts. It’s a great business move by the bank, but it also benefits customers. Win-win!

You also bring up a great point about interest and dividends. A steady stream of money is nice, and it’s important for growth. :)

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13 Vivek

The way I do my 10 transactions is during self checkout at the grocery store.
I average about $25 for 10 transactions per month.

Things like bananas, vegetables, milk, etc. are good for this. Since I scan and pay at the self-checkout, I can do one item at a time in one trip and get done with the requirements. Direct deposit is automated $1 per month.

So, all in all, I get about $50 per month for 20 minutes extra during checkout, I hope I would get that rate at my job :)

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14 Ryan

That’s one way to do it! :)

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15 Christine

I LOVE my high yield checking account! And, I’m with No Debt Plan: smaller transactions go on the debit, larger ones on the Schwab 2% cash back card. I get 4.75% APY, so I junked my savings account. All the money is accessible, not locked like with CDs (and with a higher rate to boot). I also get ATM refunds.

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