Savings rates have been in a downward spiral since 2007, and are not expected to improve until late 2014, according the Federal Reserve. Faced with dismal returns on their liquid cash, Americans may feel discouraged from keeping their hard-earned money in a bank account that doesn’t reward them for saving.
This is when rewards checking accounts can come to the rescue. Retaining many of the properties you would find in a typical checking account, a rewards checking account also pays a highly attractive interest rate (up to a certain balance), but only if you can meet a specific set of criteria.
Because of the stringent requirements involved, rewards checking accounts may not be for everyone. Here some reasons that a rewards checking account may be a good fit for you:
1. You are not happy with the return on your savings accounts.
Whether you keep your savings in a regular savings accounts, a money market account (MMA) or a certificate of deposit (CD), such rates are unlikely to beat those offered by rewards checking accounts.
Currently, the interest rates for most rewards checking accounts are above 2.00 percent APY—better than most five-year CDs and twice as good as many savings accounts, MMAs and one-year CDs. Compared to years past, 2.00 percent APY is low, but it is still competitive in a period of low rates.
2. You make at least 10 purchases every month with a debit card.
One of the most common requirements for a rewards checking account is that you use your debit card often. Many banks require at least 10 debit-card purchases a month, but requirements may vary from bank to bank.
By using your debit card to buy something, the bank earns money from the fee that merchants pay to process the transaction. It is a reason that the bank is able to offer a higher rate—your card spending helps the bank make money.
Note: Some consumers prefer to use credit cards for points, miles, or cash back. You may find that you’ll have to keep reminding yourself to use the debit card instead of the credit card.
3. You prefer electronic statements to the traditional paper statements.
Signing up for electronic statements is another common requirement for rewards checking accounts. With online and mobile banking, paper statements are costly and unnecessary. In fact, banks are beginning to charge customers when they want to receive their monthly statement in the mail. If you want the benefits of rewards checking, you’ll have to help the bank cut costs by opting out of paper statements.
4. You don’t mind shifting your current financial setup.
Another common requirement for rewards checking is that you have direct deposit. You may have to redirect your paycheck to automatically deposit into the rewards checking account. This may mean that you’ll have to reconfigure your bill payments and automatic savings transfers so that your entire financial system flows smoothly.
Actually, the entire transition to rewards checking may involve a significant change to the way you manage your money. Since debit card purchases will drain funds from the rewards checking account, interest earnings will be less as spending increases—which may call for moving money from savings accounts back into the rewards checking account.
You will have to evaluate your financial habits to find a way to maximize the amount of interest you can earn.
5. You’re looking for a checking account that has no monthly fee.
To the surprise of many savers, rewards checking accounts are often free of monthly service fees and minimum balance requirements. Even if you don’t meet the requirements to earn a stellar interest rate, it is likely that you won’t be charged a monthly fee.
This may be enough for many consumers, who’ve recently found that a free checking account is becoming difficult to find.
Rewards checking accounts are not common at big banks. So, don’t just look for the bank with the brightest outdoor sign. Your best bet is a small, local bank or credit union.
Simon Zhen is a columnist and staff writer for MyBankTracker.com. His columns cover all aspects of personal finance, with a particular emphasis on bank rates, products, and services.