Chasing high yields can be costly

High-yield checking accounts promise to put more money into the pockets of savers. And people who are willing to meet strict conditions can, in fact, earn larger-than-average returns on their balances.

But in some cases, these accounts may backfire, or at least deliver less than they promise, says Vaneesha Boney Dutra, assistant professor of finance at Daniels College of Business at the University of Denver.

In the following interview, she urges consumers to make sure they understand the nature of these accounts — and also know their own spending habits — before signing up for high-yield checking.

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

Well, the obvious advantage to high-yield checking is that consumers potentially have a higher-yielding option for their cash. In this extremely low-yielding environment, consumers may find these rates — which can be many multiples greater than what they may currently receive on their deposits — very attractive.

However, as I often say, there is rarely, if ever, a free lunch in the world of finance. These accounts often require the depositor to meet numerous requirements in order to reap the higher yield. This may include, but is not limited to, things such as a minimum number of ATM transactions, online bill pay, paper statements, et cetera.

This may not look like a problem on the surface, as many consumers likely already use an online bill pay system and may have already agreed to accessing statements online. However, the minimum ATM usage requirement may be problematic for some.

For example, if you must use the ATM, say, at least 10 times a month and you use out-of-network ATMs for some of those transactions — and otherwise might not have — then bank ATM out-of-network fees may significantly erode any gain from that higher yield.

Moreover, most high-yield checking accounts put a cap on the balance that will earn the higher yield, so all of your funds will not grow at that rate. This is likely the largest misconception about these accounts.

The average balance cap on high-yield checking has fallen from $19,118 in 2012 to $17,102 in Bankrate’s 2013 survey. Are these accounts still a good place for consumers to park their cash?

Again, it may be a good option for some consumers, but not all. If your average balance is not near these caps, then this is of little consequence to you. However, if you feel comfortable with (the) account requirements for the account, this may be a great way to earn a higher yield.

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?

Again, this question depends on the needs of the consumer. With technology and the ease at which we can move money around, I don’t believe that location is all that critical.

However, if you are a consumer that requires visits to an actual branch or if in network ATMs aren’t in close proximity, then you may be at a disadvantage given the ATM usage requirements that are often imposed.

Otherwise, this may be a feasible option. Finally, you must do the math and ask yourself whether the extra yield, relative to your balance, is worth moving your money to a bank across the country.

People who do not meet the account conditions typically receive low rates of return on the balance in their checking account. Are the typical requirements for high-yield checking accounts — direct deposit, automatic payments, monthly debit card transactions, e-statements — too difficult for consumers to meet?

Consumers shouldn’t chase yield blindly. As I mentioned before, consumers must do their homework and be realistic about whether the typical account requirements are obtainable given their current usage.

For instance, if you don’t often use your ATM card, then you may find yourself spending more or incurring unnecessary ATM fees/charges, which can significantly erode any potential gains in the yield.

Bankrate’s 2013 survey found that high-yield checking accounts offer an average annual percentage yield of 1.64 percent. Can a high-yield checking account compete with other investments such as certificates of deposit?

CDs and checking accounts are very different products. If you require a liquid account or the ability to access your funds without penalty, then a CD may not be the best option for you. A checking account and CD do not offer a fair comparison.

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

Do your homework and make sure you do the math. Things have to add up, and it has to make sense given your specific needs and account usage. Chasing yield blindly may cost you more in the end.