Over the past several months the Federal Reserve has cut interest rates several times, decreasing the Fed Funds rate from 5.25% to 2.25% at its most recent meeting. This has lead to a decrease in the interest rates on many high-yield checking accounts. Savers currently have very few options in order to earn some interest on their extra cash - open high-yield accounts at places that offer a competitive yield and get a bonus or put their money in a rewards checking account.
Rewards Checking accounts typically offer an above average yield to customers who meet certain criteria:
1) Residency – Generally the customer must live within the area of the bank which opened their account or at least in its home state. However, there are some banks nationwide that offer rewards checking no matter where in the US you live.
2) Customer also need to have a direct deposit or an automatic bill pay set up
3) They need to access their bank statements online and forgo using paper ones. Familiarity and use of online banking is essential in rewards checking accounts.
4) A certain number of debit card transactions per month needs to be performed, typically 10-12
5) Most banks would limit the balance amount for which the high yield applies, after which the yield would drop to a much lower level. This limit is typically $25,000.
If you don’t meet the requirements, then your rate drops to a low base rate instead. These requirements vary from account to account though so be sure to read all the requirements before opening an account.
There are several positives on opening a rewards checking account:
1) You get an above average interest rate, even higher than most online high-yield accounts
2) Rewards Checking accounts are not tiered accounts that require you to reach a certain balance before you can earn the top yield. Any balance up to the cap will earn the full high-yield as long as you meet the minimum requirements every month.
3) Your account is FDIC insured, which means that if the bank goes bust you are insured up to $100,000 in regular bank accounts and up to $250,000 for certain retirement accounts.
4) Most banks offer you fee reimbursements for using other banks ATMs. Thus if you need cash and you are on the other part of the country you won’t have to worry about finding the right ATM.
5) This product is more profitable for the banks. This means that banks could re-invest profits in the business translating them into more goodies for the consumer.
There are several disadvantages on opening a rewards checking account:
1) If you conduct only 9 debit transactions as opposed to the minimum of 10 or do not fill in any of the other minimum requirements, you will lose your high interest rate for the month.
2) The interest rate on rewards checking is not set in stone for a particular period of time. The bank could change it at any time.
3) There is no incentive to save more money in your rewards checking account above the balance limit. If your balance exceeds the bank limit, you will be paid the rewards checking rate on the first $25,000 but a much lower rate on any amount over that threshold.
4) Rewards checking could be a bait and switch scheme. The above average rates might be used to lure the majority of consumers into online banking, debit card usage and paperless statements. Once the behavior of the customers is changed though, banks could decrease rates in rewards checking significantly.
5) Consumers who use the debit cards forgo earning rewards points if they were using certain rewards credit cards instead of using the debit cards.
So how can banks afford to pay interest rates of 2-3 percentages points above the rates on most high-yield accounts? It’s really simple actually.
First, when they train customers to use debit cards instead of checks, they cut costs on check processing. Banks also earn money each time you use your debit card. Most consumers make a higher number of debit card transactions than the minimum requirements.
Second, by encouraging customers to bank online and receive online statements, banks save on sending paper in the mail (think postage). They also do not need as many branches as a brick and mortars bank, with drive-thru windows and extra tellers. (think administration costs)
Third, rewards checking accounts increase customer’s loyalty to the bank.
And last but not least rewards checking accounts have lead to an increase in NSF fees to consumers who over drafted their accounts.
PS Oh, and while you are on your mid-morning coffee break, why don’t you trot over to the 149th Canival of Personal Finance being hosted over at Happy Rock to see what I and other PF bloggers have to say?
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