It’s tough for savers out there. But, if you are willing to jump through a few hoops you can still earn a reasonable interest rate on your rainy-day fund.
The Federal Reserve has pledged to support the economy through the Covid-19 pandemic by driving down — and holding down — short-term rates to near zero for the foreseeable future. While this is a boon for real estate buyers and homeowners seeking to refinance their mortgages, it’s another equation entirely for anyone saving for the future: Interest rates on bank accounts are taking another beating — much to the chagrin of people who jumped through hoops in pursuit of a 1% or 2% APY return that has now vanished.
But there is one more alternative for these frustrated savers: Rewards checking accounts that yield returns of 1%, 2% and sometimes more on your money, and which can be a compelling option for people who at least want their cash reserves to keep pace with inflation.
“High yielding checking accounts have become popular with Covid-19,” says Michael Moebs, CEO and economist at financial services research firm Moebs Services. The personal savings rate shot up when the pandemic struck, and remains historically high at 19%, according to the most recent data from the St. Louis Fed.
Moebs says individuals as well as small business owners are funneling a lot of that money into checking and money-market accounts, including rewards checking.
Before you take the plunge, though, experts say you should look under the hood of these kinds of accounts. They’re not a straight-up replacement for high-yield online savings accounts — in fact, they’re not really analogous at all — and they have some different features and requirements that potential customers should bear in mind before moving their money.
What Is a Rewards Checking Account?
The exact definition of rewards or high-yield checking varies by institution (which is why it’s very important to read the fine print), but the key feature of these accounts is that you can expect to earn as much as 3% — and occasionally more — on your deposited funds.
These accounts are sometimes offered by online-only institutions but are more commonly available at small community banks and credit unions. While a lot of credit unions have restrictions on who can become a member — you often have to live, work, study or worship in a certain geographic area or have an affiliation with a participating institution — but many are making it easier these days for people around the country to join if they make a one-time contribution to a selected charity or association.
For instance, the Platinum Rate Rewards Checking account from Garden Savings Federal Credit Union lets you earn 3% APY on up to $15,000 in deposits, and if you don’t have any affiliations to the communities or organizations the credit union serves, you can join the American Consumer Council (use the code GARDEN and you won’t even have to pay the $8 membership fee.) Industrial Bank’s Kasasa Cash Checking account lets you earn 2.5% APY, also on a balance of up to $15,000.
The Biggest Difference? Use It or Lose It
A key distinction between rewards checking and high-yield savings is that you can’t just park your dollars in one of these accounts and watch the balance grow. While savings accounts tend to have a “set it and forget it” M.O. — even limiting the number of transactions you can make per statement period or quarter — rewards checking accounts expect you to use your account frequently.
“This is the major condition for higher-yield transaction accounts,” Moebs says.
That’s because those taps, swipes and dips all earn the bank or credit union money — the “interchange fee” they charge to merchants, and the reason why they can afford to offer an account with an above-average interest rate. Banking institutions that hold $10 billion or more in assets earn up to 26 cents per swipe, and institutions below that size earn up to 43 cents per swipe, Moebs says.
Make Sure You Know Which Purchases Qualify
“Typically, the requirement is anywhere from eight to 20 debit card purchases per statement period,” says Ken Tumin, founder of DepositAccounts.com. If you don’t meet the transaction threshold for a month or statement period, you won’t earn the interest that was probably your main motivation for switching to this account in the first place.
It’s important to read the fine print regarding those purchases, because although not all do, some institutions make a distinction between transactions where you enter your PIN and transactions where you sign for your purchase.
Tumin says most will allow online purchases as well as brick-and-mortar transactions, but since banks and credit unions make their own rules about that, you’ll want to check, particularly if you're one of the many people whose post-Covid shopping habits are more ecommerce-focused. He also says many rewards checking accounts will require a monthly direct deposit or an ACH transaction like paying a bill online.
Mind the Cap — These Accounts Limit How Much You Can Earn
Unlike some types of deposit accounts that only pay out generous interest if you keep a sizable balance — often in the mid-five or even six-figure territory — rewards checking accounts cap the amount on which you can earn that “reward” interest rate. The amount varies but can be as low as $10,000 — and almost never exceeds $25,000, although there are a few outliers. The remaining dollars generally earn a pittance.
Given the requirements for monthly spending, this means that you’d almost certainly need to keep a certain amount above the account cap in order to maximize the high-yield portion of your interest.