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Are Reward Checking Accounts Worth It?

What do you think of a checking account at a small regional bank offering CD rates [3] 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 [4] (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 [5].

(Photo: pocheco [6])