Dear Dr. Don,

I am inquiring about an advertised savings account paying a 6 percent average percentage yield. It is insured through the Federal Deposit Insurance Corp., but I am questioning it because the company is in the check-cashing business. The flier says, “Earn 6 percent APY. Rest assured your deposits are FDIC-insured up to $250,000.” What can you tell me about this savings opportunity?


— Nancy Niche

Dear Nancy,

You need to be careful chasing yield because you just might catch it. You’re looking at an advertisement for a prepaid debit card.

If you provide the issuer with the personal information required when activating the card, then the funds are in fact insured by the FDIC up to its limit for insurance, currently $250,000 per depositor.

With these cards, there’s an initial period where you’re in non-FDIC-insured limbo. As I understand the process, you can get a nonpersonalized starter card at a participating location, and the issuer will then mail you a personalized card. The money loaded onto the debit card isn’t covered by FDIC insurance until the personalized card is activated.

The most you can have loaded on the card earning the 6 percent APY is $5,000. It would be best to wait to load the $5,000 until you have activated your personalized card. The maximum you can have loaded onto the debit card at any time is $10,000, but you wouldn’t want to do that if you are just going to use the card as a savings vehicle because having the additional $5,000 in there would bring down your effective yield.

That yield can change at any time, but let’s say it stays constant for a year. You’ll earn $300 in interest on the $5,000. Unfortunately, the debit card charges you a monthly maintenance fee of $10, unless you chose the “pay as you go” option. There’s also an initial $10 fee when the card is issued, a $10 fee to close the account and a $2 fee to load the money onto the card.

I spoke with a representative of the prepaid debit card you’re talking about to confirm that you could load the card with $5,000, choose the pay-as-you-go option, and then not use the card in an effort to minimize the costs and maximize your effective yield. If you pay $12 in fees for the year, you would still earn 5.76 percent on your money.

I didn’t see any limitations on the number of cards you could own. But odds are if there’s a stampede of yield-starved investors showing up at participating check-cashing locations across the country to get these cards, the yield won’t stay at 6 percent for very long.

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