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High Yield Reward Checking Accounts


MVP444300
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I am looking at ways to boost my nonexistence returns on cash from 0% to something a little higher.  There is no point in my cash sitting there earning no money.  I've looked at CDs but I can't justify locking in money for 6 months to several years at 1% interest--not to mention I don't like cash being locked in because  I want the flexibility to use it when I want to make an investment or have an emergency.

 

I stumbled across a website a few minutes ago that shows special promotions, rewards, etc offered by banks/credit unions.  On there I see that it has High Yield Checking Accounts offering descent returns for holding cash; the APY on high yield checking accounts is higher than savings and CDs.

 

 

Here is an example of a local bank offering 2.78% in my area. 

 

Earn 2.78% APY* on balances up to $25,000 with the Heritage Advantage Checking Account! With an opening deposit of just $100, you can enjoy access to all the product features listed above. It’s Easy! Just meet the following requirements each month to earn 2.78% APY: maintain eStatements, have 1 Direct Deposit or ACH credit transaction per month, make 12 or more signature debit transactions per month, and use Home Banking at least once per month. (Limit one per member. Not available on business accounts.)

 

 

That is twice as good as what I see CDs locked in at 5 years are getting.   

 

Does anyone see any downside by using the high yield checking accounts instead of using regular checking, savings, and CDs for holding cash? 

 

http://www.depositaccounts.com/blog/2011/04/10-common-traits-of-highyield-reward-checking-accounts.html 

 

Overview of High-Yield Reward Checking

 

The basic high-yield reward checking account is a free checking account with no monthly service charges. You are rewarded with a high interest rate if you meet monthly requirements. Most also reward you with ATM fee reimbursements if you use ATMs at other banks. Below are the typical rewards:

 

    Some top rate (2.50% is typical) for balances up to a cap ($25K is typical)

    Much lower rate (i.e. 0.25%) for the portion of the balance over the cap

    Tiny base rate if requirements are not met (i.e. 0.05%)

    ATM fee refunds up to a certain limit per month

 

The typical monthly requirements include:

 

    10 to 15 debit card purchases

    At least one direct deposit or ACH transaction

    Receiving electronic statements

 

There are sometimes additional requirements such as logging into online banking at least once a month or performing online bill payments.

 

One nice thing about this debit card requirement is that it's favorable to savers rather than spenders. Rewards from credit and debit cards are often based on the amount of the purchases. An example is 1% cash back on the total amount of your purchases. For the reward checking, someone who makes 10 debit card purchases that total $20 can get the same level of reward as someone who makes 10 debit card purchases that total $2,000 if both maintained the same checking account balance.

 

It might seem like this model might not be profitable for the bank. I've looked into the math behind reward checking in 2009 and last year. One thing that helps make it profitable is that the average customer won't maintain the maximum balance that qualifies for the top rate. Many customers will maintain much smaller balances. Also, not everyone will meet the monthly requirements. In short, the reward checking customers who are big spenders with small balances help banks pay for those who don't spend much and maintain the maximum balances.

 

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I use series I bonds at treasury direct as a savings account. If you move in slowly, you have a steady stream of maturing I bonds that can be rolled over if/when interest rates increase. I've got the majority of my "cash" savings earning .5-1.5% + Inflation (currently 2.2%). The high yield checking seems like a lot of work if you do not currently use a debit card and the 25k cap may not work for some people...

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I am looking at ways to boost my nonexistence returns on cash from 0% to something a little higher.  There is no point in my cash sitting there earning no money.  I've looked at CDs but I can't justify locking in money for 6 months to several years at 1% interest--not to mention I don't like cash being locked in because  I want the flexibility to use it when I want to make an investment or have an emergency.

 

I stumbled across a website a few minutes ago that shows special promotions, rewards, etc offered by banks/credit unions.  On there I see that it has High Yield Checking Accounts offering descent returns for holding cash; the APY on high yield checking accounts is higher than savings and CDs.

 

 

Here is an example of a local bank offering 2.78% in my area. 

 

Earn 2.78% APY* on balances up to $25,000 with the Heritage Advantage Checking Account! With an opening deposit of just $100, you can enjoy access to all the product features listed above. It’s Easy! Just meet the following requirements each month to earn 2.78% APY: maintain eStatements, have 1 Direct Deposit or ACH credit transaction per month, make 12 or more signature debit transactions per month, and use Home Banking at least once per month. (Limit one per member. Not available on business accounts.)

 

 

That is twice as good as what I see CDs locked in at 5 years are getting.   

 

Does anyone see any downside by using the high yield checking accounts instead of using regular checking, savings, and CDs for holding cash? 

 

http://www.depositaccounts.com/blog/2011/04/10-common-traits-of-highyield-reward-checking-accounts.html 

 

Overview of High-Yield Reward Checking

 

The basic high-yield reward checking account is a free checking account with no monthly service charges. You are rewarded with a high interest rate if you meet monthly requirements. Most also reward you with ATM fee reimbursements if you use ATMs at other banks. Below are the typical rewards:

 

    Some top rate (2.50% is typical) for balances up to a cap ($25K is typical)

    Much lower rate (i.e. 0.25%) for the portion of the balance over the cap

    Tiny base rate if requirements are not met (i.e. 0.05%)

    ATM fee refunds up to a certain limit per month

 

The typical monthly requirements include:

 

    10 to 15 debit card purchases

    At least one direct deposit or ACH transaction

    Receiving electronic statements

 

There are sometimes additional requirements such as logging into online banking at least once a month or performing online bill payments.

 

One nice thing about this debit card requirement is that it's favorable to savers rather than spenders. Rewards from credit and debit cards are often based on the amount of the purchases. An example is 1% cash back on the total amount of your purchases. For the reward checking, someone who makes 10 debit card purchases that total $20 can get the same level of reward as someone who makes 10 debit card purchases that total $2,000 if both maintained the same checking account balance.

 

It might seem like this model might not be profitable for the bank. I've looked into the math behind reward checking in 2009 and last year. One thing that helps make it profitable is that the average customer won't maintain the maximum balance that qualifies for the top rate. Many customers will maintain much smaller balances. Also, not everyone will meet the monthly requirements. In short, the reward checking customers who are big spenders with small balances help banks pay for those who don't spend much and maintain the maximum balances.

 

I have 2 problems with it - I'll start with the lesser issue.  One, these types of "promotions" are normally teaser type rates.  That is, they will be in effect for a relatively short period of time and then revert back to a market rate.  Two, of much more importance, is that in this market that is an extremely high rate on that type of product.  Banks use the rate they pay on deposits as a mechanism for obtaining more (or less) deposit funds.  When they need more, they raise the rate.  When they don't, they will go with a market rate or even maybe less than a market rate in certain scenarios.  A teaser rate at a strong bank might be 100 bp or something.  A 2.78% rate tells me they need funds desperately and quickly.  I would be very leery of this situation.  If it was me and this was money that was important to me I'd want to check out whether this bank is safe and sound.  I suspect you will find otherwise.

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Banks like Sallie Mae and Everbank usually have MMA rates that are competitive with the market (and much better than what you get from Wells Fargo or other national banks). Sallie Mae is at .9% presently and Cit is at 1.1%. For me, the headaches of minimum transactions, maximum deposit, etc. etc. for the local banks (not to mention Kraven's concerns above) and the yearly deposit limit ($10k) and requirement for 1 yr deposit for i-bonds - makes Sallie Mae (or equivalent) attractive for this type of thing. The yield isn't amazing, but then a rainy day fund (which is what I use cash for) is supposed to be convenient to get to, and as a 2nd priority, have a decent yield for the more likely event that it is going to sit in the account for a long while...

 

Anyhow, here is a list of similar deals, but national and with (usually) no maximum or other requirements: http://www.bankrate.com/funnel/savings/savings-results.aspx?local=false&IRA=false&tab=MMA&prods=33&ic_id=CR_SearchCDMMAByLocation_default_CD_V1

 

 

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Kraven--I spoke with someone at the bank after posting this message they told me that the rate is set by the board of directors quarterly.  From what she said the rate has been in effect on the checking account for a year.   

 

I assumed it was a promotional rate that is why I called to ask to see how long the rate will be in effect for. 

 

Your other point about the financial stability of the bank is a good one to check into; I hadn't thought about that being the impetus of offering higher rates.  I should have remembered Ben Graham's adage that higher yield doesn't necessary mean soundness.  I figured with the bank being federally insured I wouldn't have to worry about my money.  I'm sure my deposit would be ok but there are ton of headaches getting it back if the bank had the closed. 

 

Any idea where I check on the financial health of credit unions? 

 

Ross:  thank you I will look into the US Treasury I-bonds.  2.2% yield sounds pretty good being its guaranteed by the feds. 

 

Alpha:  Thank you I will look at your link.  One question though:  how concerned are you about MMA's breaking the buck?

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From what I understand, after the Washington Mutual seizure, the FDIC sent in staff to allow depositors access to their covered funds almost immediately. Similarly, Indymac shut down for a weekend and reopened under conservatorship. If you are within the coverage amount, then it's a pretty seamless transition.

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I have 2 problems with it - I'll start with the lesser issue.  One, these types of "promotions" are normally teaser type rates.  That is, they will be in effect for a relatively short period of time and then revert back to a market rate.  Two, of much more importance, is that in this market that is an extremely high rate on that type of product.  Banks use the rate they pay on deposits as a mechanism for obtaining more (or less) deposit funds.  When they need more, they raise the rate.  When they don't, they will go with a market rate or even maybe less than a market rate in certain scenarios.  A teaser rate at a strong bank might be 100 bp or something.  A 2.78% rate tells me they need funds desperately and quickly.  I would be very leery of this situation.  If it was me and this was money that was important to me I'd want to check out whether this bank is safe and sound.  I suspect you will find otherwise.

 

Kraven, the teaser rate is more to do with the likelihood the average customer doesn't hit the metrics that are needed and then get a near zero or zero interest rate on the funds for the reporting period. Furthermore, by driving debit card activity the bank gets fee income from the card's use. It isn't much, but still noticeable when most transactions are small dollar amounts and the fees are paid on a per use basis. This is how the bank makes money on it. The actual rate paid on the account is likely lower than posted rates due to these net events happening.

 

MVP, check out this link for fdic insured institutions: http://www2.fdic.gov/idasp/index.asp

Credit Unions: (http://www.ncua.gov/Pages/default.aspx) - Financial Performance Reports http://webapps2.ncua.gov/NCUAFPR/

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Kraven, the teaser rate is more to do with the likelihood the average customer doesn't hit the metrics that are needed and then get a near zero or zero interest rate on the funds for the reporting period. Furthermore, by driving debit card activity the bank gets fee income from the card's use. It isn't much, but still noticeable when most transactions are small dollar amounts and the fees are paid on a per use basis. This is how the bank makes money on it. The actual rate paid on the account is likely lower than posted rates due to these net events happening.

 

MVP, check out this link for fdic insured institutions: http://www2.fdic.gov/idasp/index.asp

Credit Unions: (http://www.ncua.gov/Pages/default.aspx) - Financial Performance Reports http://webapps2.ncua.gov/NCUAFPR/

 

You are correct, I asked that question as well how they made money.  She said that to get the 2.78% checking account I would need to charge a minimum of 5 times per month and to charge it as credit card transaction not a debit. 

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