High-yield checking, or rewards checking, offers account holders the opportunity to earn a higher rate of interest on a certain capped amount of cash reserves than they could on a typical account, but with all the functions of a normal checking account. In return, account holders must meet a few firm conditions on how they use their account.
To get a handle on the current state of high-yield checking, Bankrate surveyed 155 banks, thrifts and credit unions about their high-yield offerings for its 2011 High-Yield Checking Survey. Bankrate found the ranks of nationally available high-yield checking accounts shrinking and yields following rates on most other deposit products downward. Despite being less rewarding than they were last year, high-yield checking accounts still have something to offer consumers, says Greg McBride, CFA, senior financial analyst at Bankrate.com.
"High-yield checking accounts remain the top-yielding place for federally insured, liquid cash," McBride says.
Yields down, but still attractive
The yield may have fallen on average from 3.3 percent last year to 2.56 percent this year, but in the context of record-low CD rates and bond yields, the average rate on a high-yield checking account can look pretty good to yield-starved savers.
The decline in yields is driven by the same forces that are pushing down rates on other deposit products such as certificates of deposit and savings accounts -- too much cash and not enough demand for loans to put bank deposits to work, says Bert Ely, a banking consultant and principal of Ely & Co. in Alexandria, Va.
"Deposits are valuable, and banks would like to have those in the future once loan growth picks up," he says. "But right now in the short term, they're awash in cash."
This banking phenomenon also is making high-yield checking accounts that are nationally available harder to find than last year, Ely says. While the number of high-yield checking accounts in Bankrate's 2011 survey only fell from 58 to 57 compared to last year, the number of nationally available, high-yield checking accounts fell substantially, from 41 to 27.
McBride says banks are being careful to avoid a flood of deposits from national customers.
"It's a little bit more of a local product than a national one right now. Last year, a majority of them were available on a national basis. This year, it's more of a 50-50 split," McBride says. "If it's only located in a certain geographic area, it's easier to manage the flow of deposits. Banks don't want get flooded with a bunch of deposits they can't turn around and lend out."
Rules of the road stay firm
For those considering a high-yield checking account, be aware they often have more stringent requirements than the average noninterest-bearing checking account. Bankrate's survey shows that the high-yield checking rules of the road haven't changed much since last year.
Debit card transactions: Making frequent debit transactions is a hallmark of high-yield checking accounts, with 98 percent of accounts requiring a minimum number of debit card transactions each month. Those that do, require account holders to make an average of 10.6 transactions a month, essentially unchanged from last year's 11 transactions.