You have probably heard about reward credit cards, but how about reward checking accounts? If not, to give you an idea they are similar to reward credit cards. With reward credit cards, your purchases are rewarded with cash back, miles, or points. With reward checking accounts, your debit card purchases are rewarded with a high interest rate on your checking account balance. There are other requirements and features with these reward checking accounts, but the high interest rate and the debit card usage requirement are the fundamental features. If you are a saver who doesn’t spend a lot, you may find that a reward checking account will be a very good deal.
Reward checking accounts are offered by hundreds of community banks and credit unions around the United States and have been growing in popularity since 2006. There are a few dozen banks which allow you to open a reward checking account online from any state. However, the majority of banks and credit unions only open reward checking accounts for local residents.
The high interest rate isn’t the only reason to open a reward checking account. Most accounts offer the following benefits:
- High interest rates if you meet the monthly requirements
- Automatic refunds of ATM surcharges if you meet the monthly requirements
- Free checking account with no monthly fees regardless of meeting the monthly requirements
- No minimum balance requirements
How high are the interest rates? The average is 1 to 2 percentage points higher than internet savings account rates. For example, many reward checking accounts today have yields of 3.00%. The best internet savings account currently only pays 1.40% APY.
In addition to debit card usage, most reward checking accounts have a few other requirements. Typical monthly requirements include:
- 10 to 15 debit card purchases
- Direct deposit or ACH debits/credits
- Receive electronic statements instead of paper statements
Another important issue is that the high rate is capped to some balance. The portion of your balance over this cap earns a much lower rate. Here’s an example of the interest rates of a typical reward checking account:
- 3.00% APY on balances up to $25,000
- 0.50% APY on portion of balance over $25,000
- 0.10% base rate if monthly requirements are not met
If you don’t meet the monthly requirements (i.e. you only make 9 debit card purchases instead of 10), you will receive a much smaller interest rate on your entire checking account balance for that one month. Also, if you had been charged by other banks for using their ATMs, those fees won’t be reimbursed at the end of the month. Those would be your only losses. The vast majority of reward checking accounts stay free with no monthly fees even if you don’t meet the requirements. You can get back on track with the high yield and the ATM fee reimbursements if you meet the requirements for the next month.
How can these banks afford to pay such high rates? The debit card usage requirement is an important part of the answer. When you make a purchase with a credit card, the store pays an interchange fee (also called a swipe fee). Part of that fee is paid to the bank that issued the credit card. Similar fees apply to debit cards.
If a customer doesn’t meet the requirements, the bank will only have to pay a small interest rate. So that makes it easier for the bank to pay the high interest rates since not all customers will qualify. The balance cap is another way banks limit the cost of paying the high yields.
Reward checking accounts have not been immune to our ultra-low interest rate environment. Like any checking or savings accounts, rates are not guaranteed to last. However, these are not teaser rates. Rates have fallen over the last few years, but many reward checking accounts still have top yields at least 2 percentage points higher than the best
internet savings account yields.
In addition to rate cuts, there’s also another worry. The balance cap can also fall. For example, the top rate may no longer apply to the first $25,000. If this cap falls to $10,000, only your first $10,000 in the account will earn the top rate. The portion over the $10,000 will earn the second tier rate which is always much lower than the top rate.
Reward checking accounts have proven to be a legitimate alternative to internet savings accounts. Like a savings account, a reward checking account is liquid and can be useful for your emergency fund. Reward Checking Accounts do require more work and have limitations, but the higher interest rates can make them a good choice for many people.
This guest post comes from Ken the “Bank Deals Guy”, the primary blogger at DepositAccounts.com, a site that helps visitors find the best deals on reward checking, savings accounts and CDs.