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Current State of Reward Checking Accounts

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Almost six months ago, I wrote about high interest reward checking accounts. Back then, the economy was weak and banking was in turmoil, yet these small regional banks were offering exceptional rates on a normally pedestrian checking account. We learned about their business model and the accounts made sense, unlike the 5% APY CDs that Washington Mutual was offering before they collapsed. To briefly recap, reward checking accounts offer high interest rates because they require you to make ten to fifteen card transactions each month and the fees from those transactions fuel the high rates. There are other requirements designed to cut costs, such as paperless statements and online billpay.

How are they doing now?

Rates Dropping

In February, each of the banks we listed offered as much as 5.25% APY on deposits up to $10,000 and 2.25% APY on deposits above that. Evantage Bank was one example. Today, they offer only 4.00% APY though the activity requirements haven’t changed. You must agree to receive paperless statements and you must make 10 CheckCard sales transactions each month.

The three other banks listed on the original post have also lowered their rates and, in some cases, lowered the amount earning the top rate. For example, First New England used to give 4.25% APY on $20,000 of deposits, now it gives 3.65% APY on $15,000 of deposits.

Limiting Availability

This hasn’t happened to the four banks we listed but many other banks offering rewards checking accounts having begun limiting the availability of those accounts to their local region. So unless you live near one of the banks offering a reward checking account, you won’t be able to open an account. As always, call the bank to confirm that you can open an account, even if you don’t live in the area.

Despite the falling rates, if you’re willing to deal with a little bit of hassle, you could be getting some good rates on your checking deposits.

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25 Responses to “Current State of Reward Checking Accounts”

  1. Frank Fitton says:

    Sounds like a great deal they got going there. I can see why some of them are limiting availability. Of course there’s always the fear some people have of dealing with a small regional bank, but their all FDIC insured so I don’t see it as making a difference.

    Unfortunately, I’m here in South Florida, land of big banks or the highway, lol. I think people in other areas should be all over this.

    Very informative post!

    • Steven says:

      Check out Eastern Financial (www.effcu.org), they’re at 3.05% for rewards checking right now. Not that many branches, but you get to use Publix ATMs for free, which makes an ATM within 5 minutes of wherever you are.

  2. Andrew says:

    I have a hard time seeing how the debit card fees subsidize the rewards. If I make 10 debit transactions averaging $20 each over a month, and the bank gets 1%, that’s $2, but my $25K balance (the most they allow to earn the maximum rate) earns $73.13 at the 3.51% my credit union pays me. I think they’re really hoping I’ll miss one of the requirements, which would lower the rate to a below-market 0.11%, or basically zero.

    • Shane says:

      I think they expect that a lot of people will use these as their regular checking account. By doing this, a lot of people will use way over the 10 minimum. I have one at two different banks. One for savings and one for checking. The savings I use the minimum of 10, usually a dollar at a time for a drink. The checking account consistently averages well over 40 debits a month between myself and my wife.

      • Andrew says:

        I’m a fan of cash, so I racked up 13 transactions in the first three days of the month and plan to spend cash the rest of the month. If you’re a debit card fan, you’re going to use the card against your regular checking account frequently, regardless of the interest rate, so I don’t see how this benefits the bank. I guess they are getting a dozen or so more debit card transactions out of _me_ in a month, but that hardly pays for the fat interest payment I get each month.

        • govenar says:

          “If you’re a debit card fan, you’re going to use the card against your regular checking account frequently, regardless of the interest rate, so I don’t see how this benefits the bank.”

          But that person probably never would’ve opened this account in the first place if it didn’t have a high interest rate. I think it’s kinda like an advertising expense for the bank, making more people aware of them.

  3. Anonymous says:

    I have chased these rates for over a year now. It seems like every time I open a new account they drop the rate. I went back to my original credit union, offering 4%. Currently have 2 accounts with them. I have not missed a cycle. The 10, now 20, transactions a month are pretty easy.

  4. Anthony says:

    I’m currently earning 4.50% on my rewards checking. I still have a separate online savings and ladder CD’s. But for the money that would otherwise just be sitting in a regular checking account, I might as well earn something. I use my debit 10+ times a month anyways.

  5. Patty says:

    Interesting page I came across. It points out advantages to banks for reward checking.

    http://www.strunklp.com/custom.asp?id=128274&page=28

    One thng it says is:

    “Increases Overdraft Revenue. Without exception, every financial institution that has introduced Reward Checking has seen a significant increase in overdraft related revenue”

    • dilbert69 says:

      I have a hard time understanding how this would be true. At 3.51% I keep $23K in mine to max out my rewards (the cap is $25K, so when my paycheck and some miscellaneous deposits come in, it might get close). I might “overdraw” my account by dipping temporarily below $23K if I have to pay my VISA card before the paycheck hits, but I’m never going to go below zero. Wouldn’t most people keep fairly significant sums in these accounts? If you’re living paycheck to paycheck, interest rate doesn’t really matter, right?

  6. James says:

    I continue to hop from one account to another as they lower their rates if the rate is lower than 1% from the highest I can find. Unfortunately, those banks that use the Chexsystem are getting wise to this and are beginning to deny such people who appear to be “rate jumping”.

  7. I still get 6% APY on my rewards checking account from my local CU. Woohoo!

  8. eric says:

    Yup I’ve been keeping my eye on this but can’t be bothered by the 12 transactions a month my CU requires. I know there are ways around it but my CU rate isn’t high enough to persuade me….yet. :)

    • Andrew says:

      Why not just use the card for things you’d otherwise pay cash for? As long as the merchant doesn’t add a fee (most don’t, at least where I live), you’ll rack up the 10 transactions in no time and can go back to using cash the rest of the month.

      • govenar says:

        For pretty much everything I would normally pay with cash, the reason is that they don’t take credit cards, so I couldn’t use a debit card for them anyway. But I do have one RCA. I use the debit card for small purchases that wouldn’t give me that much reward from a credit card.

  9. Henry says:

    Rate hopping/chasing is worthwhile, especially when one has a large sum of cash. All it takes is ACH transfer, say using Ally as the transfer hub.

  10. Henry says:

    FAB&T, a popular RCA bank with 4.4%/$50K limit suddenly drops its rate to 3.5% in November, limit to $35K; and limit to one account. They must be pretty desparate to take thses multi-fold rescue measures.

  11. Garp NYC says:

    When I deposit $25,000 in a bank account, the bank can turn around and loan out many times that amount. This is fractional reserve banking. The bank can pay me 5% on $25,000 = $1,250 per year while loaning out $250,000 at 10% = $25,000. Money doesn’t grow on trees. Banks create it out of thin air.

  12. SavingEverything says:

    GarpNYC is right. Banks have something called float and capital tier floats. It’s usually about a 1:10 float ratio. But, the rates on loans for most of bank lending is not 10%; it depends on the type of bank and the types of loans they lend. How do banks make money? No statements to produce or send out; limited # of checks to process against your account; hope that you use their bank services like wire transfers, cashier’s/certified check, or even return deposit item fee; hope to charge NSF fees; about 2% on your 10-13 debit credit card transactions; hope you dont fulfill a requirement so they dont pay the high interest rate or refund any ATM fees/ surcharges.

  13. Henry says:

    Some of the most experienced banks with RCA offers are bailing out: FAB&T, Charter, Dedham Savings; to name a few. It is because the banks are not really making an acceptable profit out of it, no matter what the claim and commercials state.

    Because most RCA customers are the smart shoppers, who put in the maximum amount, charging minimal debit, and incur no overhead (NSF, wire, etc.) fees.

    But enjoy while it lasts.

  14. Henry says:

    My RCA strategy: Keep my money in RCAs as long as there are options to get 4% APY.

    Once these options diminish, I would either pay off my 4.75% mortgage or pay back my HELOC with those money. In other words, 4% APY is my absolute minimum threshold, considering my trade of high rate vs. effort.

    Note that both paying off mortgage and paying back HELOC are effortless. BTW, my HELOC is at 2.24%.

  15. Susan says:

    I have several reward checking accounts. It is a bit of work, but getting 4.5%+ on my money these days is worth it, in my opinion. I pay me cell phone or cable bill online in small increments to meet the debit card usage.

  16. SavingEverything says:

    Way the go Susan! My bank lowered its tiers and the rate; plus made changes to the qualifications. –Don’t forget that most participating banks in RCA pay a fee and have some contractual agreement with a firm, predominantly BankVue-FirstROI, that provides various services, tools, and consultants for these high yield reward checking accounts. Another pitfall of RCA: if banks can’t get enough qualified customers for personal loans, home equities or mortgages (depending on geographical areas or clientele), then they cannot lend and profit as much as they had hoped. Also, don’t forget that for all purchase transactions with your debit card, the interchange fee actually gets divided, not equally, to several firms: your Bank (the card issuer), Visa/Mastercard, and the merchant’s bank or transaction processing firm.

    • Henry says:

      Above post: Good point. Thus never, Imean never fall in love with any RCAs.

      Just take a look at FAB&T, for a long while, we all thought that they have their unique way of keeping their rate/limit high and it was a win-win for both the bank and their RCA customers.

      The rate-hopping is agile at least at the present time, since none of the banks are limiting pull from an outside source (say Ally). If they start to change that policy (like HSBC, Emigrant Direct; for online savings), then one really need to carefully strategize an exit approach before signing up for such accounts.

  17. Henry says:

    BotS dropped rate from 4.51% to 4.09%, still not bad.

    I will keep my BotS accounts for a while.


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