April 1st, 2010
What’s The Deal With Rewards Checking Accounts?
Rewards checking accounts is the banking product you wish you had all these years. It gives you the best of both worlds, earning interest at a better rate than a regular savings account and giving all the convenience and practicality of a checking account.
Also known as high-yield checking accounts, more local banks and credit unions are offering this attractive alternative to traditional big bank savings and checking accounts, so know the basics before you sign up.
The Perks
The biggest incentive for switching to a rewards checking account is the better higher interest rate than any checking account or typical savings account. The average APY for rewards checking account is 3.3%, with some as generous as 6.17%, according to a Bankrate.com study. Compared to the average less-than-1% APY you’ll find for most checking and savings accounts, you stand to earn a good bit of cash by switching to rewards checking.
For example, switching from my current Wells Fargo savings account with 0.05% APY to a rewards checking account at the smaller Liberty Bank with 3.51% APY would earn me $1,890.33 more in interest for a $10,000 balance over 5 years. How could you say no to an extra $1,900, just for switching to the right banking product? (Remember, these figures are calculated without taking into account any withdrawals and spending you will have to make with a rewards checking account.)
Plus, with a rewards checking account, you don’t have to worry about the limited withdrawals of a savings account and you have the option of spending your money conveniently. Also, if you are looking for good customer service, you’re in luck; you’ll find most rewards checking offers at local banks and credit unions rather than big banks, which generally have better service than you’ll find at big banks.
The Catch
There are several requirements you’ll have to meet. Rewards checking have stringent terms in order to open an account or earn the highest rate offered. Many require a minimum number of monthly debit transactions, which means the money can’t just sit there and earn interest. Some also require additional direct deposit, online banking, or bill pay enrollment. Failure to meet these requirements may drop your prized APY to a much lower default return.
There are also balance caps to consider as you shop around for a rewards checking account. The balance cap, often $10,000 or $25,000, limits the amount of money you can earn with the high-yield rate. Most institutions operate on a reverse tier system, in which you earn the highest rate under a certain balance amount, and exceeding that amount will drop you to the default rate (which averages far below 1% at most institutions).
Details on how to meet the requirements for a rewards checking account or earn the top tier rate vary from institution to institution, so make sure you know what strings are attached.
Ready To Make The Switch?
Savvy banking customers should use this type of account mostly to stash savings, not spend on a regular basis or big ticket items. The higher your balance, the more your money works hard to make the most of the high APY; but you still need to make occasional small purchases–like a tank of gas or grocery run– here and there to meet the requirements.
Before you get seduced by the high-yield rate, make sure it fits your financial lifestyle, such as how you plan to use your account and also how much money you plan to deposit (watch out for that balance cap). But if you’re willing to jump the extra hoops and monitor your account closely, the hundreds of dollars in extra cash you’ll earn in interest is a good enough reason to make the switch.
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High-interest accounts, whether checking or savings, are great for any money you’ve got sitting around not earning interest for you. Most Americans, however, don’t keep much in their checking account. And they’re not getting much back from these types of accounts, even at 3%+.
If that’s you, you’re much better of with an account that gives you rewards (real rewards, not interest) for all your everyday spending. I might be biased — my company, PerkStreet Financial, gives our typical active customer hundreds back annually. But other banks, big and small, give rewards for everyday spending as well.
Dan O’Malley
CEO, PerkStreet Financial