Dispelling Rewards Checking Account Myths

by Kevin on October 7, 2010

Earlier this week I told you to celebrate because major banks are phasing free checking accounts out of existence. If the major banks stop offering these accounts all the smaller and community banks will eventually fall in line and do the same.

I told you to celebrate, to move to a new kind of account. An account I’ve fallen in love with: the rewards checking account.

Several readers stopped by to comment on the article and I think we had a great discussion going.

I was somewhat surprised at the confusion and misunderstanding around reward checking accounts. One user, Anonymous Coward, had this to say:

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.

Other readers thought that rewards checking accounts had really high minimum balance requirements.

All in all it seemed there was some confusion surrounding these accounts, and I thought I would dispel some of the myths around good* rewards checking accounts.

After we’re done dispelling myths today I’ll share some resources where you can find the best accounts. That post will go up next week so stay tuned.

(* There are good and bad versions of just about every type of banking and investment product out there. I’m not arguing that there are some banks that follow the myths below. My point today is to show you what good rewards checking accounts look like.)

Low Opening and Minimum Balance Requirements

Myth: Reward checking accounts have high minimum balance requirements.

When a bank offers a reward checking account the reward interest rate is capped. This means that after a certain amount of money in your account you’ll stop earning super high interest. You’ll still earn interest after the cap, but it will sadly be more “normal” like 0.75%.

This seemed to be confused with some of the readers of my last post who thought there were really high requirements to get to the high interest rate. It’s reversed — keep your deposits under the cap and the entire amount in your account earns the higher interest rate.

All three (yes, three!) of our reward checking accounts had very low opening minimums. Two were $50 and the third was $100.

Sustainable Interest Rate

Myth: Reward checking account interest rates are “teaser” rates that can’t last.

This one is a bit more tricky because you have to have a feel for what’s reasonable to offer. If I see a bank offering 7% rewards on your entire account I immediately get suspicious. That rate is simply unsustainable.

On average you’ll see accounts in the 2% to 3% range with a handful above 3%. Anything over 5% and my mental red flags go up.

The reason you should be wary of an extraordinary rate is the bank may just be using that rate to attract deposits. Once they get more deposits on hand, they slash the rate.

Poor business practice over the long run, but it does work. So avoid it.

Look for banks that have offered long periods of stable rates on their rewards checking account. Ask a representative how long the rate has been at it’s current position. Follow that up by asking of any news or expectations of the rate falling. (You probably won’t get an answer on that one even if they did know.)

Reasonable Eligibility Requirements

Myth: Reward checking account requirements are difficult to meet every month.

The huge perk for using reward checking accounts is how easy they are to use. I haven’t had to change my spending habits or do anything out of the ordinary to meet the requirements to earn the higher rate.

Here’s a summary of what our banks require us to do to earn the rewards checking rate:

  • 10 debit card transactions per month (one account asks for 12 transactions, the other two are 10)
  • 1 direct deposit or an ACH transfer (e.g. when your utility company takes the money out of your account to pay your bill; this is different from banking bill pay)
  • receive statements electronically

That’s it.

Seriously.

Granted I take clients out on lunches at work three to five times per week, so I might have more opportunities than you to swipe my card than you. Even if I didn’t have those opportunities my wife and I still wouldn’t have an issue getting 32 debit card swipes per month. (And it’s not because I’m a spendaholic, either!)

And we’re going above and beyond by having three accounts. Every person I know swipes a card of some kind at least 10 times per month. Don’t you?

Bank Stability

Myth: Only banks on shaky financial ground offer reward checking accounts.

Remember these are myths of what good reward checking accounts do. I’m not saying these things don’t happen especially this one.

A scenario like this might play out:

You’re a bank. Times are tough. Customers are leaving. Your deposits are down which makes loaning money out difficult.

What can we do…? Hmmm, well, if we want to attract a lot of deposits very quickly we could just offer an insane interest rate on a product. People will love that.

And they do. They come in droves. Deposits are up — hooray! — but wow this interest is costing us a lot. Slash the rate. We know customers probably won’t leave so quickly. It took a lot to get them past the mental inertia to simply open up our account. We win! Pop the banker’s favorite champagne!

This kind of stuff can happen, but you can avoid it. There are a few services out there that will help you judge the health of a bank. Target banks that are well rated. (Yes there are well rated banks out there that still offer great rewards interest rates. I have accounts with two of them.)

Checking Accounts are for Bills Only

Myth: Checking accounts should only be used for bills and daily expenses.

This was the most befuddling comment from my previous post. I quoted the comment at the beginning of this article.

This person apparently thinks that earning a high rate of return — a return that is higher than saving accounts (at the time of this writing) — is dumb because it’s called a checking account.

Let’s do a quick comparison. One of my rewards checking accounts is currently paying 2.60% on balances up to $25,000. My ING Direct Savings account (one of my all time favorite online banks) is currently paying 1.10% on balances.

For comparison purposes let’s say you have $50,000, and you split that money up evenly between the rewards checking account and ING Direct.

At the end of the year this is what the interest looks like:

  • Rewards checking interest earned: $650
  • ING Direct Savings interest earned: $275

Why would you ever choose the lower amount? It doesn’t make sense to me.

But maybe it makes sense to you — feel free to illuminate me in the comments. In my next article I’ll show you where to find the best rewards checking accounts. Stay tuned.

{ 19 comments }

Sun October 7, 2010 at 2:43 pm

> Low Opening and Minimum Balance Requirements

Thanks helping me see some accounts offer low minimum balances for reward checking. I’m sure our ideas of low can vary, but $100 would be considered low in my view as well.

I think perhaps the perception of high minimums are because those that I have seen advertised online are from banks that perhaps have the budget to advertise. Typically, I’ve seen accounts require $5,000 average daily or more to qualify for reward checking. While the truth of low minimum requirements is accurate, I don’t think this gets advertised as much as the higher minimum accounts.

Kevin October 7, 2010 at 7:05 pm

This is absolutely true. There are some banks out there that promote “rewards” checking. But those programs are more geared toward points or cash back systems (at least I think so?) than giving you interest.

Stay tuned for next week’s post on where to identify some of these banks that you could use.

JimmyDaGeek October 8, 2010 at 1:14 pm

I avoid reward checking accounts because they depend on the status quo of banks sticking it to merchants with card transaction fees every time you use your debit card and sign for it instead of using a PIN.

Once merchants are allowed to add surcharges to card purchases and require minimum purchases, the party will be over.

Sun October 8, 2010 at 1:34 pm

Do you happen to know the difference in cost to the merchant for the customer to use their PIN (debit) vs signing (credit)?

Kevin October 10, 2010 at 4:25 pm

My accounts do not differentiate between PIN purchases and signed purchases. It’s just 10 or 12 debit transactions.

Even if that were the case who said merchants are forced to accept debit or credit cards? It’s a cost of doing business.

But your point is moot. My accounts allow for either so I can use the less expensive PIN purchases where appropriate.

JimmyDaGeek October 11, 2010 at 3:13 pm

Interesting. Every rewards checking account I’ve seen makes you use a signed purchase. In fact, cash cards, like those that Payoneer sell, that are now used for rebates, don’t even have a PIN.

Sun October 10, 2010 at 6:01 pm

Even with 2% rewards, I would never expose my debit checking account for any type of purchases. Its just too risky with the prevalence of identity theft. If you have disputes with your bank with your debit purchases, those transactions in dispute is real money you may need access to. A true credit or charge card is much easier to deal with in this manner. I know several friends who purchase with their debit card and had criminals run up their debit card for thousands of dollars. My friends had to deal with checks bouncing which cause NSF from the bank and late fees from the payee. All very risky stuff just so you can get 2% cashback.

Kevin October 10, 2010 at 6:11 pm

For starters it isn’t 2% cash back. Cash back implies you’re only getting cash back on the purchase. It’s 2% on your entire account.

While I agree with your sentiment — I much prefer to use credit due to security risks and dealing with “real money” from my account rather than credit from the credit card company — there are still so many measures in place to protect the consumer that it makes it worth it to risk exposing the account for 10 to 12 transactions per month.

Sun October 10, 2010 at 6:14 pm

Then I would just have a checking account for the interest and use a separate credit card for purchases.

Kevin October 10, 2010 at 7:26 pm

Exactly. But you still have to swipe the card 10-12 times to get the interest. That’s the trade.

Golfing Girl October 10, 2010 at 7:51 pm

I’m with Sun–I do NOT use my debit card for the reason that it exposes me to unneccessary risk that I simply don’t have with my rewards credit card (Amex bluecash). I also HATE having to constantly update my check register with transactions when using a debit card so I don’t use it. A rewards checking is simply not for me.

Dirigible October 17, 2010 at 11:37 pm

I agree that having to update a check register for every transaction is a nuisance, and in many cases, it just doesn’t seem practical.

Rewards Checking accounts make the most sense for people who have at least a moderate amount of money they can put into it. If you have only $500, we’re talking about less than $2 a month.

I want to keep as much as I can in Rewards Checking (up to the capped amount). As long as I have an extra month’s worth of money in the account, there’s not going to be a problem with overdrawing the account.

Also, I mostly use my Rewards Checking debit card for fairly small transactions, probably under $20 per transaction, while using a credit card for larger transactions. That means I’m continuing to get almost all the benefits of using a credit card (such as cash back points), and at the same time, I’m keeping a higher balance in the Rewards Checking account.

Jason November 1, 2010 at 9:49 pm

I WANT to believe you but..

I currently get 5% on gas year round with my credit card.

I currently get 5% on movies/entertainment year round with my credit card.

I currently get 5% groceries/food/restaurants year round with my credit card.

I currently get 2% on everything else year round with my credit card.

And I live in NJ, meaning I can’t do the pump my own gas for $1 trick.

If I replaced my 5% cash back credit card swipes and use debit to a 4.5% rate which will fluctuate, it seems I might be better where I am now?

JimmyDaGeek November 3, 2010 at 9:34 am

Can you enlighten us as to which card gives all this to you? All the the cards I know of have changed their model to regularly sign up for categories that are rotated throughout the year and to reduce their generic rewards to 1%.

Dirigible November 2, 2010 at 1:57 am

Comparing the rewards on your credit card to the interest paid on a rewards checking account is really apples and oranges, because the credit card rewards are based on the amount of the transactions involved, while the interest on rewards checking is based on the balance in your checking account, provided you meet the minimum transaction requirements.

If you’re spending $500 a month on credit card transactions that give you 5% cash back, that’s $25/month or $300 a year. It would take about $7000 in your checking account to earn that much at 4.5%. But the good news is that you can do both — transactions which will provide you with a comparatively large cash back on your credit card should be made with your credit card, while you use the debit card on your rewards checking for smaller transactions and those that would have lower cash back percentages, as long as you make sure to meet the minimum number of transactions requirement.

Too much trouble and/or not enough savings to make it worthwhile? That’s a fair objection and there really are things that are more important than maximizing the return on your money. But for people who are frustrated by the negligible returns available on CDs, this is a way to put that money to work for what doesn’t necessarily involve much extra effort.

Jason November 3, 2010 at 10:12 am

Jimmy,

My post was probably unclear, should have edited.. but I have four cards (I know, but it’s very easy to use).. and you are correct everyone touts the Discover Card but I hate having to check which quarter I’m in and what services I should be stocking up on to get 5%. Nevertheless, I don’t use “rotating cards,” and have:

1. Gas Card – 5% gas, 1-2% everything. Only use it for gas
2. Restaurant/Entertainment/Movies Card – 5% on R/E/M 1% everything else. Just use it for R/E/M
3. 2% on Everything.Anytime – Use it if not in above field
4. Debit Card – Just carry it since it’s linked to Checking

Drigible,

Good points, I’ll have to run the numbers in Excel to see if the hassle of “12 Transactions/month” is indeed worth it. Thanks for giving #’s in example to put into perspective.

I just have 2 questions.

1) Does a counted “transaction” have to be an actual swipe? (Ie will it count if I give them my card number? Will it count if I give them Routing/Account to my Rewards Checking?)

2) Also regarding arbitrage, assume I have a cable bill for $115.00/month. Can I really pay that vendor (or a couple vendors) 12 small payments in the month to get to that $115.00? I hear some programs deem it as fraud, and read of others who use this trick.

If the latter, sign me up, that’s easy enough.

Thanks guys (or gals)!

Kevin November 3, 2010 at 12:48 pm

Dirigible is SPOT on. Ace comment of the year! If you have no money and spend everything on a credit card then yea, those credit card rewards look just fine.

But if you have cash in the bank — and cash that you don’t turn over every month (I would be impressed if you spent $25,000 every month…) then that’s where the reward checking account comes in to play.

We do the exact thing Dirigible described: we use our reward checking accounts until we hit the transaction limits, then we kick down to our credit card and put the rest there. Our credit card rewards (usually $400) will probably go down this year, but we’ll earn WELL over that in interest income from the reward checking account.

Great discussion! Keep it up!

LovingIt! January 31, 2011 at 3:30 pm

I’m really late to this conversation. But, wanted to chime in. I have a rewards checking, GoGreen account at RCBbank.com minimum balance is $100. It pays 4.1 apy, on a monthly basis on balance up to $25,000. I moved $25,000 over there, then deposited a little more for “spending cash”. I buy my gas and shopping with my debit card. 12 swipes a month. My banker suggested I buy gas in $2-$3 increments to be able to quickly get my 12 swipes. I put a limit of $200 a day on the account. so, if someone does hit me on the head and steal my card, they can only get $200 per day… until I wake up. (the $200 includes withdrawals, debit swipes, use of debit card #, everything in a day). So, I feel pretty good about this. My money was earning a whopping .63% at my credit union, so I’m $$ ahead. I still use my rewards/cash back credit card for most of my purchases and bill paying. This account is just my shopping and gas money, because I fund the amount about $25,000 with rebates, paid surveys, rewards, swagbucks etc. and the $80 a month interest will roll right into more shopping money!

LovingIt! January 31, 2011 at 3:35 pm

Jason, can you please tell me the name of the 5% gas card? I am trying to help a friend who spends A LOT on gasoline, this sounds like a great card for him. the best we’ve been able to fin is 3%. thanks!!

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