The factsConsumers are having an increasingly difficult time finding a basic free checking account, much less one that earns interest.
At the big banks, the only way to earn interest (albeit a minuscule amount) is to get premium checking account. The unfortunate attribute of these accounts is their high fees (often $25+), unless you maintain balances of $25,000 or more at the bank.
Rewards checking, offered at some community banks and credit unions, is an exception. Here are some pros and cons of these accounts:
How you can qualify for rewards checking
Though qualifications to receive the extra benefits vary from account to account, there are generally 3 requirements you’ll be asked to meet:
- Make 10-15 debit card transactions each month
- Have at least 1 direct deposit or 1 ACH automatic withdrawal clear your account each month
- Use self-service options, such as e-statements, online banking, ATM deposits, bill pay, etc.
Why these qualifications?
Electronic options such as direct deposit, e-statements and others save the bank money by limiting expenses related to check processing, postage, teller wages, etc. Debit card purchases actually earn the bank money through interchange fees paid by merchants.
If an account is truly free, meaning no monthly fees for not meeting the monthly bonus requirements, then there’s not too much downside to choosing a rewards checking account. The worst-case scenario is that you’ll be left with a standard free account, which is a difficult feat in itself.
Consumers might find themselves straining to meet the monthly requirements, especially the minimum amount of debit card transactions. By forcing more debit card transactions than usual, they may end up overspending a budget or even potentially triggering an overdraft. In that case, the interest earned will never make up for unnecessary spending and fees.
So, for those considering a rewards checking account, the FDIC sums it up quite well:
Choose an account primarily because it meets your needs, not just because of the rewards. If you end up choosing between two accounts with similar terms and features that both meet your needs, it’s fine for the rewards to be the deciding factor.
Other opinions and advice
Sandy Warner, VP of Financial Services at Connexus Credit Union (Wausau, WI), explains what kinds of members typically choose their rewards checking options, and why they are so popular:
Currently, 48% of our members with checking have one of our rewards accounts. We find that our rewards checking options are best suited for members who actively use their accounts, desire a strong interest rate, and enjoy debit card and online conveniences.
Members of Connexus Credit Union have been enjoying the benefits of rewards checking since April 2007. We currently offer 2 options: our Xtraordinary Checking Account which features a rate that’s 4 times the national average, and our MyRewards Checking Account which also has a high rate but fewer requirements to qualify for rewards.
Besides a high interest rate, members with our rewards checking account also benefit from ATM surcharge rebates and no minimum balance requirements. Plus, even if the requirements for the accounts are not met during a particular month, members will still receive this account for free and qualify for a base level of interest.
Frank Trotter, president of EverBank Direct, provides some insight from the perspective of an online bank and highlights recent trends in rewards checking. EverBank does not offer a rewards checking account, but their Yield Pledge Checking account offers a competitive rate on the entire balance with no requirements (rate increases with higher balances).
At EverBank we are all for innovation in banking so when we saw these appear several years ago we were intrigued. If you have studied the terms carefully and you think you can meet the requirements each and every month then maybe they might be an alternative for you. However shoppers need to read and understand the Rewards Checking Account Bonus Rate requirements to determine if a Rewards Checking Product is worth the effort.
Most of the Rewards Checking products have a Bonus Rate eligibility cap. When these products were launched a few years back, the cap was as high as $25k. Today the caps have dropped significantly and many now have caps of $10k or less. Balances above the cap earn a lower rate, generally between 0.05% – 0.10%, which is not a great way to make more money.
Jen Mathis, a veterinarian located in West Des Moines, IA, describes her positive rewards checking experience at a local community bank.
I have an account at Bank Iowa. They have great customer service. The three criteria are: sign up for paperless statements, have one automatic deposit, have 10 debit/credit card swipes per month—get 3% interest in all balances up to 25,000! Get 0.5 % interest on balances over $25,000. Basically use the account a few times per week and one is set!