Major Banks Saying Goodbye to Free Checking Accounts

by Kevin on October 4, 2010

Do you have a free checking account with a brick and mortar bank? Enjoy it much?

Prepare to kiss it goodbye. Big banks are planning to phase free checking accounts out of existence according to a NY Times article.

Don’t worry. This is the best thing that could happen to you if you use free checking accounts.

Blasphemy? I’ll make my case then you decide.

How Do You Benefit from a Free Checking Account?

Think about it for a second. Do you really benefit from a free checking account?

What do you get? An account that doesn’t charge a monthly fee. Usually you get a debit card.

That’s it?

That’s all the big bank is offering you for all the money in your account?

Here’s what they get in return for offering you an account without a monthly fee:

  • the ability to earn a lot of interest on those funds you’ve deposited by loaning it out on car and home loans
  • the ability to earn revenue from merchant fees (the fee a retailer pays whenever you swipe your debit card)
  • the ability to earn fees from overdrafts
  • the ability to earn additional revenue when you order packs of paper checks
  • the ability to hook you into other financial products like mortgages, auto loans, and credit cards

All that for dismissing a small monthly revenue tied to the free checking account.

Brilliant, but you deserve better…

Get Rewarded for Being a Customer

It’s time to drop your free checking account before your bank cuts it for you.

Head to the promised land. Head to the closest stable bank that offers a rewards checking account.

What is a Rewards Checking Account?

A rewards checking account is a checking account that offers the potential to earn a high interest rate on your deposited money if you meet certain criteria. Here’s why you need a rewards checking account.

Here’s the trade. The bank gets all the benefits that they get from a free checking account. You can’t do much to change that.

What you can change is what you get in return. My rewards checking account is paying 2.6% on my deposited cash up to $25,000. That’s a lot better than the typical 0.2% you get from a brick and mortar savings account. It’s even beating out the big online banks like ING Direct.

How to Qualify for Rewards

It depends on the bank, but for most all you have to do is get your statements electronically, get a direct deposit OR an automatic paid ACH, and swipe your debit card 10 to 12 times per month.

That’s it.

In other words you’re probably already doing all of those things and not getting paid interest for it.

Let’s do some simple math. Assuming you were just okay at saving money and had $10,000 in the bank, and you got 2.60% on that money every month, how much interest would you earn? About $21 per month or $260 per year. If you maxed out the account at $25,000 you would earn $650 per year (about $54 per month).

If that doesn’t get your attention I don’t know what will. Imagine having $20 or $50 extra every month to apply to debt or saving goals!

Here’s further reasons to consider reward checking accounts.

Why Banks Offer Reward Checking Accounts

Why would a bank offer such an amazing product? Why pay interest on a checking account?

Simple: it’s profitable, drives customer growth, and brings in a lot of deposits.

That’s all well and good, but you’ve got to be careful. You don’t want to be attracted to a heavily underfunded bank that might fail in the future.┬áRead up on why banks offer reward checking accounts.

Switch Banks Today

Your free checking account is going to be discontinued at some point. And you don’t really need a free checking account. I’m a huge fan of reward checking accounts, and recommend going ahead in identifying a new bank today.

I’d love to hear some people who disagree. Why would you stay with a free, non-interest bearing checking account?

{ 14 comments }

Sun October 4, 2010 at 6:16 pm

Maybe people have free checking because they don’t have much liquidity and meeting the monthly minimum is very difficult.

Kevin October 4, 2010 at 6:28 pm

I really can’t believe that would be the case. We’re talking about a really low bar here… $100? $250? $500 minimums? If someone can’t afford that then they’re not in the market for any account, in my opinion.

The kicker with reward checking accounts is not only do you get interest… there are no additional fees. It’s like free checking as long as you meet the requirements.

Red October 4, 2010 at 10:56 pm

Uh… Well, I’m 23 and paying on debt right now. But because my debt is earning interest every day while my checking account isn’t, I tend to spend as close to the balance on my account as possible every month. Here’s what I mean…

I get paid $800 twice a month. I immediately pay $900 per month to my debt before doing anything else ($600 from my first paycheck, $300 from the next). Then I pay for expenses like bills, groceries and gas. I also use the money for entertainment when we feel like going out. When I’m a day or so away from my next paycheck, I make an additional debt payment. My account nearly zeros out because of this. (I do keep a few dollars in it as a buffer so I don’t accidentally overdraft.)

I wouldn’t consider myself “not in the market for any account.” I consider what I’m doing smart because my debt is earning 6.8% interest every day of the month. Even if I did have rewards checking, I wouldn’t be making enough in interest to justify keeping money in checking instead of applying it to my debt. And I think the same applies to people who have high interest debt. They’d be crazy to keep money aside for a measly 2.6% interest when their debt is accruing much more than that.

Sure, if you’re debt free, you have a greater opportunity to have a cushion in your checking account. And it would make more sense to have rewards checking if the alternative is a low-rate online bank. But in the case of anyone with debt, especially those of us without emergency funds, it makes more sense to have as little cushion money in your account as possible. (I do recognize that a lot of people with debt have emergency funds, in which case it makes sense to get a rewards account, but those of us who don’t have extra cash because we’re paying on our debt so aggressively shouldn’t be considered “not in the market for any account.”)

Kevin October 5, 2010 at 6:06 am

First, I applaud you for being aware of your debt problems and tackling them head on. Great job.

And I understand why you would dismiss 1%, 2%, even 3% on a rewards checking (or any other type of) account to pay down debt of 6.8%. That’s a smart long term decision.

But I disagree with the not having an emergency fund. At 6.8% it sounds like that is student loan debt. I’m sure you’ve got thousands of dollars in debt, and while it is good you’re making additional payments on the debt I would be curious how fast you would pay it off at that rate.

When you know that you’ll be able to calculate how much of a delay you’ll incur by stopping the additional payments for a while to build up an emergency fund.

I’ve written about emergency funds a lot (here, here, and here.)

If I’m right and your debt is student loan debt you probably couldn’t tap into that money if you had an emergency and no funds to cover the emergency. You would need to borrow from some other place — like a credit card — and that interest rate is a monster.

In that situation it would be extremely beneficial to have some money, even just a little bit like 2 or 3 months, set aside just in case an emergency pops up. You’ll push your debt payoff date back a bit and you’ll certainly pay a bit more in interest, but your financial foundation should be a bit more solid.

Best of luck and thanks for stopping by!

Anonymous Coward October 5, 2010 at 10:56 am

You should work for a bank’s marketing department. This is a terrible idea for the consumer, and only benefits the banks. Even if someone could afford to meet the minimums, they’re wasting that money by keeping it in a checking account, even if they’re getting “returns”. Checking is for bills and day-to-day expenses.

Kevin October 5, 2010 at 12:54 pm

Instead of throwing out unsubstantiated claims that it is terrible for the consumer and only benefits the banks, why don’t you back up your claims? You’ve already admitted to being an Anonymous Coward so I don’t fully expect a response, but here goes:

Just because your concept of checking accounts is only for bills and day-to-day expenses doesn’t mean you can’t earn significant interest from the account. Would you rather the bank call it a “reward account” than a “reward checking account”?

An account is an account. My ING Direct Savings account is paying 1.1% currently. My rewards checking accounts earn 2.6% and 3.0% up to $25,000 deposited.

Which is better? Do you want 2.6% interest or 1.1% interest?

It’s basic math. If you would choose 1.1% because it is a savings account instead of a checking account… then I don’t know what to tell you. I’ll take the higher interest for the simple act of swiping my debit card every single time.

Sun October 4, 2010 at 9:40 pm

Really $100 for reward checking? You must tell me where. Most of the reward checking accounts I’ve reviewed require much more than that. The bar is seems higher than $500 from what I’ve reviewed. If its only $100, that would be great. I’ll sign up tomorrow. I hate to pay $14 a month for my business checking.

Kevin October 5, 2010 at 7:56 am

Check out DepositAccounts.com under checking accounts. You can also try bankaholic.com or gobankingrates.com to help identify these types of accounts.

Our 3 accounts had minimums of $50, $50, and $100 and have no fees. It’s like free checking with a bonus on top of it.

Tara October 5, 2010 at 1:38 am

This is exactly why I moved from Wells Fargo to a local credit union this past summer.

I was tired of having to maintain a minimum balance across all of my accounts that was continually changing and could be anywhere between $500 to $1,000 to $2,500, an automated monthly transfer to a useless savings account (I could only transfer *my* money out of my savings account on business days before 6 pm for it to post that night!), and a direct deposit of some amount.

I don’t even know what requirements I’m missing, but I was fed up. I just wanted a checking account that allowed me to make debits. I tried ING’s Electric Orange for awhile, but sometimes, you just need to write a check. I prefer to support local merchants and write a check instead of having them be charged card fees. I’ve been happy with my credit union for the last few months and they even pay a high interest rate on the first $500 in my checking account, so that I earn about $6-9 in interest per quarter, which isn’t bad.

Golfing Girl October 5, 2010 at 6:40 am

Whoa, whoa, hold on there. My bank has no such magical “free” rewards checking. They all have monthly fees or require huge minimum balances (some require $25,000!), which the average person would never have. The minimum “rewards” checking requires $4000 minimum balance to avoid a $20/mo. fee unless you have at least a $100,000 mortgage with the bank. The “rewards” in my opinion are not worth it.
For the record, I HATE using my debit card–having to constantly update my checkbook. I use it only if I need cash.
I’ve always seen Rewards checking accounts for those who maintain very large balances–and if you’re doing that, your money could be earning a lot more elsewhere if invested wisely. Sorry-I’ll stick with free checking.

Kevin October 5, 2010 at 7:53 am

If your bank doesn’t offer a “magical” rewards checking account, leave!

I think you may understand the required minimums. The $25,000 is a limit on how much money you can get the higher interest rate on, not the minimum required to get the limit.

I have 3 reward checking accounts and none of them have monthly fees. The only penalty of not meeting the requirements (debit card swipes, ACH or direct deposit, electronic statements) is you get a lower interest rate (usually 0.25% or 0.75%) rather than the rewards rate (2.6% and 3% in my case).

You are right in that rewards checking accounts are for those that maintain large balances. And I agree that there are other (more risky) options that could earn a higher return.

But an emergency fund is part of my plan and that money has to sit somewhere. Could I put it in a CD? Sure, but to get a rate close to 2.6% or 3% you’re talking about a long term CD — locking up your money for a long time without any liquidity. Let’s say you have $2,000 worth of expenses and you are targeting have 6 to 12 months of expenses saved up. That’s $12,000 to $24,000.

Let’s say you’re at the lower end… $12,000. At 2.6% that’s $312 in interest per year. At $24,000 it would be $624 per year.

To some that might not be that big of a deal — but for doing essentially no extra work (just using my card like I normally would) I would gladly take a few hundred extra dollars per year.

Plus, after I hit my transaction requirement (10-12 transactions depending on the bank) then I switch back to the AMEX Blue Cash card and continue to earn cash back there, too.

The three accounts we have have minimum requirements of $50, $50, and $100. So not sure where the confusion is there.

I use DepositAccounts.com to find these banks — some are state dependent, others are not.

Sun October 5, 2010 at 12:59 pm

I’ve never owned a rewards checking account before. Do these accounts get categorized as interest income like savings accounts for tax purposes? Or are they more like points or rewards you get with credit cards?

Kevin October 5, 2010 at 1:20 pm

It is categorized as interest income just like you would get from a savings account.

Adam February 15, 2011 at 6:47 pm

Hi guys, I think all banks are the devils, i never see any rewards i never see anything from banks i have had accounts with apart from bad customer service and redeculas fees left and right, GO FREE CHECKING. i dont want to pay someone to keep my money its just a joke. banks always try to make money they dont think about you!

there should be a free account in my opinion for people who dont believe in awards and all that BS. get real why stopping college accounts where everywhere around the world banks have college account with special services and no fees why do america has to be always different in bad way?!

please if you make a thread like this do not encourage people to get into this trap and change account or banks just stand against this kind of legal rip off. we pay enough taxes and fees anyway no need for banks to shuv it to us also.

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