The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice

February 18, 2010

Are Reward Checking Accounts worth it?

Filed under: Real Example, Simulation, Uncategorized — Tags: , , , , — thebalancedspreadsheet @ 11:54 am

If you have been paying attention to your savings account interest rate lately you have noticed a very depressing looking rate earned on your money.  Most of the time it has been less then 1%, but there is good news for those who want to earn a decent rate on their checking.  Many small local banks and credit unions have started to offer reward checking accounts that let you earn anywhere from 3-4% APY depending on the bank.  Reward checking has been around for 2-3 years and there are some hoops that need to be jumped each month to receive the desired interest rate but for many including myself it is worth the effort.

The 3-4% may not seem a lot but when compared to 1.25% the results are pretty significant:

Reward Checking Interest Comparison

Based on the example on the right, if you had $20,000 in a checking account you would receive about $45 more a month in interest using a reward checking account compared to a regular savings account.  I would recommend first going to either checkingfinder.com or depositaccounts.com to where you can do a search to find the closest bank or best deal.  Just like certificates of deposits or savings accounts, each bank has its own rate and requirements.  While the higher interest rates are nice, there are some drawbacks that should be considered before going through the paperwork and hassle of switching banks. 

The first drawback is the balance limit.  Most of these accounts have a cap of $25,000 (some have $50,000 cap, with lower rates) meaning you will only get the high interest rate up to the cap limit then anything above the cap receives a low rate, usually below 1%.  Therefore there is a limit on how good of a deal this can become.

The next drawback is the monthly requirements.  You will want to make sure that the requirements are met each month because if you do not, the interest rate earned plummets to around .25% for that month.  Most of the requirements are pretty simple and convenient, enroll in monthly electronic statements, have direct deposit or online bill pay once a month.  But the debit card requirement is the one that trips most people up.  The requirement is that you must make anywhere between 10-14 debit card purchases a month.  Those who use multiple credit or debit cards can sometimes find it hard to keep track of how many purchases a month you have made.  Remember missing the purchases by just one means you forfeit the interest rate for the entire month.

Finally the last drawback is that usually the interest rate drops a few months after the introduction of the account.  This happened to me with my reward checking account through Charter Bank of New Mexico.  I signed up in the winter of 2008 with the rate at 6%, which it later dropped to 5%, then 4%, and as I wrote about back in November it dropped all the way down to 1.25%!  The bank ended up getting bought out and the rate today is a depressing .25%.  While this is an extreme example just remember that the nice looking rate might drop a percentage point in a few months. 

Overall I find that high interest reward checking to be a very nice feature.  I just recently opened a new account with Farmer’s Citizens Bank that pays 4.01% APY with a $25,000 limit and 12 required monthly debit card purchases.  The purchases requirement does not bother me much because I use my debit card anyways on most of my purchases so there is nothing that I need to do special to meet the requirement.  The interest earned will not make me rich but it is still nice to get about $50.00 extra a month more than I would if I just left it in a regular savings account. 

Are there any other interest rate chasers out there that have tried reward checking?

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