A perfect storm of bottom-of-the-barrel interest rates, high fees and high minimums is making interest checking a less appealing option than in years past.
If you're an interest checking account holder, seeing Bankrate's 1998 Checking Study might make you feel a hint of nostalgia. Back then, interest checking accounts were paying an average of 1.35 percent and you only needed to keep an average $1,561 in the account to avoid service fees, which averaged $9.29 per month.
True, your interest earnings weren't exactly setting the world on fire back then, but compared to Bankrate's 2010 Checking Study averages of 0.1 percent yield, $3,883.40 minimum balance required and a $13.04 monthly service fee, 1998 seems like the good old days.
"One monthly fee of $13 could outweigh a couple of years' worth of interest very easily," says Greg McBride, CFA, senior financial analyst for Bankrate.com. "It's not an efficient use of money. You have to strand a very large balance at a very low interest rate just to avoid fees."
Instead, McBride says that most people who only need to access big sums a few times a month would do better with a free, noninterest checking account linked to a high-yield checking account so that you can access bigger amounts easily.
"You're not encumbered by balance requirements and monthly fees," McBride says. "That's money that can be better deployed to something like a high-yield savings account where you can still get to it in an emergency, but you can earn a much more competitive return."
But despite these flaws, getting something for your checking account balance is better than getting nothing at all, argues Bert Ely, a banking consultant and principal of Ely & Co. in Alexandria, Va.
"A lot of it is a convenience factor," Ely says. "Why not get a little bit of interest instead of none at all?"
If you do decide to stick with an interest checking account, finding a way to get the institution to waive high fees and minimums is key. While only 3 percent of interest checking accounts in Bankrate's 2010 Checking Study were considered free, another 30 percent offer waivers if account holders meet certain conditions, such as having multiple accounts at the same institution, says McBride.
But even then, you could end up losing out on yield on other accounts just to keep that interest checking account free, says McBride.
If you like the convenience of earning interest without having to move your money, but don't want to accept high fees and multiple banking relationships that may or may not be beneficial, the answer may be to shop around.
For instance, some online banks and credit unions offer high-interest checking with lower minimum balances and little or no fees in exchange for conditions such as making a certain number of bank card transactions where you "sign and swipe" rather than enter a PIN code.
Either way, as Bankrate's annual checking study continues to show higher fees and yields scraping the bottom of the barrel, interest checking account holders may find themselves making increasingly unattractive compromises in the name of convenience.
Our checking study data are gathered by surveying the top 10 banks and thrifts in 25 of the country's biggest markets. We asked those institutions about terms on one generic noninterest account and one interest-bearing account most applicable to the general consumer.
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