Rewards checking account returns still outpacing other types of investments
July 07, 2011
Although high-yield checking accounts are getting scarcer and are offering lower interest rates, they still compare favorably to other places you can pick to park your money.
High-yield checking accounts, also called rewards checking, allow customers to earn a relatively high interest rate on large deposits, ranging from $500 to $50,000.
The amount you can earn the elevated interest rate is typically capped, however. According to the Associated Press, the most common maximum balance is $25,000, although 10 of the 14 highest-yielding accounts limit your interest-earning balances to $10,000.
You can have more than that in the account but the interest drops significantly beyond that point. One example cited recently by USA Today was Atlantic Coast Bank, which pays 3.01 percent on balances up to $15,000 and 0.50 percent on anything over that amount.
According to USA Today, the average interest rate on a rewards checking account is 2.56 percent, down from 3.3 percent in 2010. By comparison, the best CD rates are just 2.36 percent, with interest rates on CDs averaging 1.64 percent. The CD rates for shorter-term accounts are much lower. The problem with investing when interest rates on CDs is so low is that there is a chance the interest rate will go up while you're locked in to a lower rate.
Advantages of rewards checking
Although the interest rate on rewards checking is inching downward, they remain a good investment if you follow the rules set out by your bank.
USA Today reported that banks and other financial institutions require that you use your debit card a certain number of times each month--usually at least 10 times. You interest rate is adjusted downward if you use the card less, and according to foxbusiness.com, some banks will actually monitor your checking account to determine if you're using the card for a series of small-change purchases.
One way banks can afford to pay the higher interest rates for rewards checking is by collecting swipe fees from merchants when you use your debit card; the smaller the purchase, the smaller the bank's income.
Other options to rewards checking
Despite those requirements, rewards checking customers are also often reimbursed for their ATM fees, and others offer loan discounts and free online budget widgets.
USA Today also notes that online savings account rates are also appealing to consumers concerned about the lower interest rates on CDs. Online savings account rates are approaching 1 percent on a $10,000 balance--five times greater than what's offered at physical bank branches.
Making the right checking account choice
Although AP reported that the number of national interest checking accounts has dropped from 41 to 27 in the past year, local banks and credit unions offer an additional 57. It might pay to check with local banks because many offer the best interest checking deals to local customers, hoping that they'll be able to sell those customers on other bank services.
