High-yield checking perks have strings

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High-yield checking accounts continue to offer top rates to customers who perform specific banking activities each month, according to a Bankrate.com exclusive survey of 211 banks and credit unions across the nation.

Bankrate found that 58 of the banks and credit unions it surveyed offer high-yield checking accounts, with rates ranging from a high of 6.17 percent to a low of 0.75 percent, according to the study.

However, customers must jump through a series of monthly hoops to earn those returns. Important details about how these programs work vary from institution to institution — as do the requirements for earning hefty yields.

Some of the high-yield programs are restricted to local customers only. But 40 of the 58 institutions surveyed also offer the accounts nationally.

(Editor’s note: On April 5, 2010, Bank of the Sierra stopped offering Sierra Reward Checking nationally.)

Average terms and conditions of high-yield checking accounts
High-yield APY Default APY Monthly debit card transactions
3.3 percent 0.16 percent 11

Common requirements

While each institution has its own rules, the survey found that savers typically must perform some or all of the following account activities a certain number of times each month in order to earn high returns:

  • Debit card purchases.
  • Direct deposit.
  • Bill pay or accessing online banking.

Account holders also may be required to view their statements online each month.

Failure to meet any of these monthly transaction quotas results in earning a much lower return on your money for that month.

According to Bankrate’s survey, customers who fail to perform the required transactions during a statement cycle will see their monthly yield drop down to a default rate of anywhere between 0.5 percent and 0.04 percent.

Once the customer gets back on track and meets account rules, the rate will increase again for the next statement cycle.

High-yield checking accounts impose a few nearly universal requirements, regardless of which institution is offering them. For example, account holders almost always must participate in a certain number of debit card transactions each month to qualify for the high yield.

Bill pay and direct deposit requirements
Bill pay required Direct deposit required Either bill pay or direct deposit required
35 percent 43 percent 48 percent

The most common number of transactions required is 10 per statement cycle, while the average is 11, according to Bankrate’s survey. Ninety-five percent of banks and credit unions surveyed require a certain number of debit card transactions per month, with a range stretching from 10 transactions to 15.

In addition, 91 percent of institutions require account holders to use bill pay and/or direct deposit each month in order to qualify for the top rate. About half, 48 percent, allow customers to choose between direct deposit and bill pay rather than having to use both.

High-yield hoops
According to Bankrate’s exclusive study, to earn the highest rate on a high-yield checking account:
  • 95 percent of institutions require a certain number of monthly debit card transactions.
  • 91 percent require monthly direct deposit and/or bill pay.

Balance caps

Because high-yield checking accounts offer greater yields, many customers keep larger balances than they would in their day-to-day checking account.

However, most institutions that offer high-yield checking accounts also have a balance cap that limits the amount of money on which customers can earn the inflated yields, according to the Bankrate survey.

“Banks will often put in place some type of reverse tier where it would say your checking account can only pay you that interest up to a certain threshold,” says Richard Solomon, a director with Novantas, a financial services consulting firm in New York.

Bankrate’s survey found that the most common balance cap is about $25,000. Any additional dollars in the account that exceed the balance cap earn the default rate rather than the high-yield rate.

Customers should keep balance caps in mind rather than simply looking for the highest yield.

See survey results:
Find the results for individual banks and credit unions in Bankrate’s exclusive high-interest checking account survey.

For example, BECU, a credit union, offered the sweetest yield of the bunch in Bankrate’s survey — 6.17 percent. However, BECU imposes a $500 balance cap. That means you’ll earn 6.17 percent on only the first $500 you keep in the account.

Three of the accounts surveyed have no balance cap. Of those, two offer their rates nationwide.

Who benefits?

Greg McBride, senior financial analyst at Bankrate.com, believes the smartest banking customers treat high-yield checking accounts as a place to stash savings.

“The people that will use this most effectively will not be using this debit card to purchase a big screen TV,” he says. “They’ll make the required purchases with incidental transactions, a tank of gas here and there. It is a checking account but the savvier people will use it as a savings account.”

While customers benefit when they play by the rules, so do community banks and credit unions, says Gabe Krajicek, CEO of BancVue, an Austin, Texas-based product development and marketing company for small financial institutions and the company responsible for REWARDChecking-branded programs.

“Reward checking is typically twice as profitable as free checking and the attrition rate is half of what you would see with free checking accounts,” he says.

In other words, the banks make more money and their customers stick around longer.

Other features push customers toward less expensive delivery channels such as online banking and e-statements. Further requirements, such as direct deposit, ensure some customer inertia once they’re set up, according to Bert Ely, principal at Alexandria, Va.-based Ely & Co., a consulting firm to financial institutions.

“They have these requirements for the stickiness, it’s a bit of a hassle to set up direct deposit or bill pay,” Ely says. “The more people do that the stickier they are, because it’s more of a bother to switch away.”