When Reward Checking Accounts Bite Back

by Kevin on August 3, 2012

Over the past several years I have trumpeted the benefit of using a rewards checking account here on No Debt Plan.

I just got slightly burned by one, so I thought I’d share my experience.

Before we get to that, let me do a brief review. Reward checking accounts are designed to increase the number of deposits at a bank or credit union. This is done by offering a substantially higher interest rate to draw in new customers. (Many people think rewards checking accounts are based on your spending; some are, but the real value is getting a high interest rate on your deposits.)

There are “catches” of course – you have to swipe your debit card 10-15 times per month, have an ACH or direct deposit on your account each month, and get electronic statements.

In short, you probably already do the things the account requires but you can get great interest rates. If you fail to meet the requirements you get minimal interest paid out that month.

Here’s a few more articles I’ve written on reward checking accounts:

However, as I mentioned, it doesn’t always go perfect.

Risks of Using a Rewards Checking Account

There are two main risks of using this type of an account. I think the risks are worth it, but it is something to keep in mind.

The Bank or Credit Union Modifies or Cancels the Program

The largest risk is that you go through the trouble of setting up an account, but only get to enjoy the benefits for a few months before the financial institution cancels the program.

Banks use these programs to draw in customers and drive up deposits. Once they’ve achieved that goal they usually keep the program running for a while, but there’s no guarantee they won’t stop it immediately. In that case you’re left with an average checking account paying hardly any interest.

Other times the bank won’t close off the program completely, but will slash interest rates significantly. The result it the same: you aren’t getting the interest you thought you were going to get and end up looking for a new account.

You Fail to Meet Qualifications

The second risk is just making sure you meet the qualifications each month. We’re talking about the ability to earn $20 to $40 in interest each month, so slipping up by not having enough debit card swipes can be costly. (At least you can control this risk, so I don’t consider it a major problem.)

How I Got Burned by a Rewards Checking Account

A few years ago I opened an account with Danvers Bank up in Massachusetts. They weren’t geographically limiting who would be eligible for an account and they offered something like 2.5% interest on a rewards checking account up to $25,000 in deposits. That means you could earn $52.08 in interest each month if your account was maxed out.

Danver’s was then acquired by People’s Bank, but no major changes happen at first. Then the interest rate went down a little bit to 2%. Still competitive – about $41.66 in interest if you maxed out the account — and not worth looking for a new bank just yet.

Well, it’s time to look for a new bank.

This month I looked at my statement and was absolutely floored to see I had earned a whopping $5.14 in interest.

People’s customer service said they had informed customers they would be dropping the rewards program and paying out interest of 0.25%, but I honestly think that was a lie. I never received anything in the mail, and I never received an alert or electronic message in the online account area. The Customer Service Representative I spoke to said there was an alert on the account, but when I asked her why I never saw anything even though I logged in 8 times (your statement shows how many times you log in).

She stuttered and said, well, uh, it was supposed to be there.

Right.

I know what happened. You canceled the program for out of state customers and cut the rate for your local customers. And so you could hold onto my cash for a while longer to eek out a little bit more profit, you didn’t notify me. You know I have little recourse other than to cancel the account.

But that’s okay. I’m surprisingly okay with this.

Why?

I’ll tell you in my next post.

{ 2 comments }

Golfing Girl August 3, 2012 at 7:25 pm

I’ve always hated rewards checking account programs because of the obscene amount of required transactions. My money is MUCH better spent by using rewards credit cards and earning 1-5% cashback and KNOWING I’m going to earn that reward and not having to remember to do a thing except pay my credit card bill on time and in full. Obviously those who don’t pay them off each month have no business getting these accounts because the interest rates are higher.

Kevin August 4, 2012 at 9:32 pm

I really don’t understand this mentality unless you don’t have any money at all.

Would you rather earn 2% on your $10,000 sitting in the bank, or 1-5% on spending $1,000 per month?

One encourages you to spend less and save more, the other encourages you to spend money to get the most cash back.

You would have to earn 2% cash back on spending $833.33 to equal the interest on 2% on $10,000 in savings. Plus you get to keep the $10,000 and not spend $833.33 of it.

With even more money it becomes impossible to beat with reasonable credit card spending.

Do you swipe your credit card 10-12 times per month? Do you check your account online at least once? Then you’ve met a majority of the requirements. It really isn’t that hard — and after you meet the requirements you can switch back to using your rewards credit card 🙂

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