checking

High-yield checking: Losing ground on rates

Don R. Cox, Ph.D., CFPJust a few years ago, high-yield checking accounts were the favored darlings of hardcore savers. The accounts promised returns much higher than those of typical checking accounts.

The account holder had to jump through a few hoops each month. But doing so netted safe, relatively big, guaranteed returns.

However, high-yield checking accounts have lost much of their appeal in recent years, says Don Cox, Alfred Adams professor of banking and finance at Walker College of Business at Appalachian State University in Boone, N.C.

Cox explains his thoughts in the following interview.

What are the advantages and disadvantages of high-yield checking for the consumer?

High-yield checking accounts provide an opportunity to earn a higher interest rate on short-term deposits, especially as compared against checking accounts that pay no interest or only a token amount of interest. In the current interest rate environment, however, rates on these so-called high-yield accounts are only "high" relative to zero.

The primary disadvantages of high-yield checking accounts are the requirements and rules associated with the accounts -- minimum deposit amounts, minimum number of debit transactions per month (typically 10 or more), direct deposit requirements, use of electronic statements only and/or other items.

If the customer does not meet the requirements each month, they will not be paid the higher yield. And, in some cases, failure to meet certain requirements can result in fees or other expenses.

With the average balance cap on high-yield checking falling from $19,118 to $17,102 in Bankrate's 2013 survey, are these accounts still a good option for consumers looking to park their cash?

The accounts can still be a good option for parking moderate amounts of cash, but the attractiveness of the accounts continues to diminish, in my opinion.

Lower balance caps, lower "high-yield" rates and fewer institutions offering truly attractive rates make it slightly more difficult to find an account that is attractive. While there are some high-yield checking accounts with yields around 2 percent, there are many accounts labeled as high-yield, but with interest rates less than 0.75 percent.

Many accounts are available nationally. Would you advise consumers to consider opening an account elsewhere in the country to gain a higher balance cap? Or would you advise them to stay local? Why?

A willingness to consider opening an account outside of one's local area is often necessary to obtain the highest interest rates on such accounts. Some of the best rates are offered by smaller banks, credit unions or banks in smaller market areas.

A potential disadvantage of opening an account in another part of the country is that the customer may have limited access to ATMs and/or to other local services that they might wish to have.

These accounts often pay low rates if you don't meet the account conditions. Are the typical requirements for high-yield checking accounts -- direct deposit, automatic payments, monthly debit card transactions, electronic statements -- too difficult for consumers to meet? Are these accounts worth the trouble?

It depends on the customer and what they are willing and able to do. For some customers, the requirements are not particularly burdensome if they are similar to the normal banking behavior of the customer.

For other customers, the requirements are a constant headache and are not consistent with what they normally want in a banking relationship. For this second type of customer, these accounts are often not worth the trouble for the relatively low amount of incremental interest earned.

With an average 1.64 annual percentage yield in Bankrate's 2013 survey, can a high-yield checking account compete with other investments, such as certificates of deposit?

For deposits up to the level of balance caps on high-yield checking accounts (often something around $25,000, but often less), high-yield checking can be very competitive with certificates of deposit.

For larger amounts, certificates of deposit are often a better choice as they do not usually have such low limits on deposit size and pay a stated rate on the full amount of the deposit.

The high-yield checking account obviously provides easier liquidity, but if one is viewing the high-yield checking account as a place to park money to earn interest and is not as concerned about the checking component of the account, it is a competitive alternative to a CD only up to levels not impacted by the balance cap on the account.

What advice would you give a consumer considering a high-yield checking account?

Look before you leap. Be sure that you understand all of the information related to the account and will be able to meet the requirements imposed by a high-yield checking account before making a deposit.

Unless you are comfortable that you will monitor it closely and meet all requirements (account minimums, debit transactions, direct deposit, et cetera), it is often not worth the effort. Rules, rates and requirements for these accounts change over time, and the depositor must remain alert to changes.

Still, if you are comfortable that you can meet all the requirements, these accounts can be a nice alternative and a relatively easy way to pick up some extra return on a checking account.

Steve Pounds, senior editor at Bankrate.com, contributed the questions for this interview.

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