Are Reward Checking Accounts Worth It?

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Stacks of Bound $100 BillsWhat do you think of a checking account at a small regional bank offering CD rates level yields? That’s right, a checking account that offered 5% APY or 6% APY? I bet your fraud detector would go flying off the radar, that’s what mine would do! However, you’d be wrong. Reward checking accounts are legitimate checking accounts and the yields are real, the only downsides are that they come with stringent rules that must be followed if you want to achieve that yield. If you’re able to follow them, the rewards are great.

Typical Reward Checking Account Rules

Let’s look at a standard reward checking account offer, this time from the Community Bank of Pleasant Hill (FDIC #58423), a small community bank opened near the end of 2006 and operating in the Pleasant Hill neighborhood of Kansas City, MO. What it offers is a rewards checking account that pays 6.10% APY on balances up to $25,000. You read that correctly, 6.10% APY. In addition to the great rate, it has a $100 opening balance, no minimum balance, no maintenance fees, free online banking and bill pay, and a check card. Everything about it is just like a checking account, except the rate.

Now check the “qualifications” for this rate. In order to earn that exceptional rate, you need to satisfy the following:

  1. Make at least 10 debit card transactions (Point of Sale) per statement cycle
  2. Have at least one monthly ACH direct deposit or ACH auto debit
  3. Receive your statements electronically

If you don’t satisfy all three, you earn only 0.30% APY. Now, number two and three are a piece of cake
to satisfy – simply direct deposit your paycheck and then elect for electronic statements. Number one, the ten debit transactions, is the one that most people run into problems with. Ten debit transactions is a lot of transactions in a month for some and hardly any for others. This is the one that usually causes problems for some.

How Do Banks Make Money?

How can a bank pay 6.01% APY on your funds and still make money? They make it off the debit card transactions and the money saved from electronic statements. Whenever you use a credit card or debit card to make a payment, the merchant you’re buying from will pay several percentage points in fees. This is how credit cards can offer rewards, they charge 3% in fees and give you 1% as cashback. When the bank requires you to make ten debit card transactions, they’re betting on the fact that you will earn then more in transaction fees than they will pay out in interest. Judging by how reward checking accounts are still widely available, it’s clear this strategy works.

Are Reward Checking Accounts Worth It?

I think so. Most checking accounts don’t offer interest, so if you opened a reward checking account and failed to make 10 transactions, you’d still earn 0.30% APY – more than from a standard checking account.

There is always the risk that you fail to satisfy all the conditions of a reward checking account but the downside, in this case, is small because the non-reward bonus rate is still higher than most standard checking accounts.

Remember to Shop Around

I chose the Community Bank of Pleasant Hill as an example because it had pretty standard requirements, not because it had the best yield or the best terms. Some reward checking accounts offer higher interest rates, or a lower rate on a higher balance amount, or additional terms (some require you to login to online banking or set up two bill-pays each month)k, so weigh the advantages against the disadvantages. You are most familiar with your financial situation and what requirements are most easily satisfied. One thing is certain though, most reward checking accounts offer rates that absolutely crush high yield savings account rates.

(Photo: pocheco)

{ 8 comments, please add your thoughts now! }

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8 Responses to “Are Reward Checking Accounts Worth It?”

  1. Alfonso says:

    I find that it’s generally worth the effort. You usually don’t have to direct deposit your check. Quite often any regular debit, like autopaying your credit card will suffice. I meet the debit card transactions by paying $1 to my cable or telephone company every day for the first ten days of the month.
    However, the rates can change anytime. I have switched reward accounts twice over the last year when the 6% rate dropped below 4.5%.

  2. Patrick says:

    This is really a great option and allows people to go eco friendly while still getting monetary benefits from it. Erik, thanks for the great tool, I will be checking it out.

  3. Brad says:

    I capture 5.00% APY on my checking account with the exact type of requirements listed above with an account in Iowa. My banker friend tells me their bank has to do it to compete for the larger accounts. It’s the exact reason why they have to have so many branch banks in surrounding communities.

    If you keep somewhere around the maximum $25,000 in the account throughout the year, the after-tax earnings come to about $900 (the after-tax APY on account is only 3.75% remember).

    When I opened the account, it was quoted as a non-teaser rate of 5.25%. Two months later, they dropped it to 5.00%. So I now make all of my 10 required transactions at once at the gas pump. It takes me an additional 5 minutes per month to capture the 10 transactions, so about an hour per year. Not bad to be paid $900 for an hour’s worth of work.

    I continue to put all other purchases on my cash-back credit cards. The bank would not be happy with me, but the game was designed by them. I’m happy to play it.

  4. Mr. Banker says:

    I’ve noticed a bank in my area that offers this product has cut their rate from 5% to 4% recently. on the plus side they pay on balances up to $50k as opposed to the $25k I see from other banks offering reward checking.

    The banks that offer this product are community banks and they focus on relationship banking. They want to get all of the business from their customers and to compete with “the big boys”. The large banks focus on transactions (transactional banking).

  5. kris says:

    Pleasant hill dropped their rates from 6.125 to 5.01% on Dec 23rd 2008.

    Thought I will share for anyone looking to open one.


  6. David says:

    I have a Reward Checking account through my credit union in Santa Fe. Meeting the criteria each month is a no brainer, I was meeting the criteria long before they offered the program and now I get refunded any foreign ATM fees. My credit union is very open about what they do and why and they have said that they are trying to build long term relationships. They are willing to pay a high rate but in return want some loyalty back (hense the requirements) and ask that we give them them first chance at all other financial services – I think its a fair request.

  7. Welby johnson says:

    what happens if you miss the requirements in one Month and meet it the next

    • Jim says:

      You won’t get the reward rate the first month (when you missed the requirements) but you will get the reward rate the second month (where you meet the requirements).

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