Low Federal Funds Rate Pinches Reward Checking Accounts

by Kevin on March 13, 2013

I’ve been telling you about my favorite type of bank account for a few years now. The glorious rewards checking account offers so many benefits above your regular checking account that the comparison is really unfair. (Check out Why You Need a Rewards Checking Account.)

You’re telling me I can get a higher interest rate for being forced to use my debit card a certain number of times, setting up direct deposit, not using paper statements, and logging into online banking once per month?

Sign me up. I do those things anyways. I’ll take the free rewards on top of it.

But I’ve found a long running problem has started to impact these accounts negatively in the past 6 months. The impact is enough to make me consider if having multiple reward checking accounts is even worth it.

Reward Checking Account Interest Rates Continue to Drop

Back in the day, waking uphill both ways in the snow barefoot, was a great time to have a rewards checking account. You could easily find accounts that paid 4-6% (about 1% above what the high yield savings accounts like ING Direct were offering at the time). Considering my long term investing plan has a goal of about 7 or 8% return getting that from just your checking account was amazing.

Then recession happened.

And the economy sputtered.

And the Federal Reserve dropped interest rates.

The rates dropped not once, not twice, but multiple times until the Federal Funds rate became 0.25%.

The Federal Funds rate is the rate that lending institutions can borrow from each other, usually on an overnight basis.

If they can borrow funds at 0.25% that makes the value of the deposits from customers worth a lot less than the 4% to 6% that had been paying on reward checking accounts. That mixed with the fact that reward checking accounts are often used to bring in massive deposits to help a floundering financial institution means they are quick to drop interest rates whenever possible.

The worst part is most reward checking programs don’t offer much if any notification that the interest rate is about to drop.

My accounts have gone from 4%, to 3.5%, to 3%, to 2.5%, to 2.25% and 2.0%… all for the same requirements in terms of debit card swipes and so forth.

I try not to complain too much because 2% is still better than the 1% or less you get from online savings accounts or the 0.00000001% you might get at a normal checking account rate. But seeing interest rates get cut in half hasn’t been fun. I’m getting a lot less interest than I would if rates were back to where they were when I started.

Is a Reward Checking Program Still Worth It?

We are left with the question of is the use of these programs still worth it for customers? Should I keep working to get my 10 to 15 debit card swipes each and every month to get a smaller and smaller return?

I’ll tackle that question in my next post. We’ll dig in to the math behind whether these programs are still worth the trouble of swiping your debit card to meet the requirements.


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