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Plan Well, Retire Well

Saving and investing your money

High Interest Checking Accounts: Are They Worth It?


I've recently been intrigued by a couple of discussions about high interest checking accounts. My interest was further piqued when a good friend regaled me with his high-interest account story. It included last minute trips to buy tiny items using their debit card, to meet the account's requirements. But the payoff was substantial, and he was very pleased with the arrangement.

The Backstory

Years ago, I became disenchanted with my checking account, but I didn't see any other great alternatives. The accounts I saw were Frogs: they offered a minimal interest rate and no monthly fee if I kept a minimum balance. So I stayed put, until one day I saw an advertisement in the mail. A small local bank was offering to pay half the prime rate on the full balance of your checking account. Bingo! That's what I'd been waiting for - a Handsome Prince! Good interest, no hassles, and a local bank. I don't remember for sure, but maybe I had to have one automatic deposit per month. The only downside was a limited number of ATM locations where I could conduct transactions without a fee. The balance in the account ballooned as I began to use the account to hold our emergency fund and other short-term savings, as well as money for monthly expenses.

It was a fairy tale marriage – until the economy hit the skids. A notice in the mail welcomed me to a new bank. Mine had failed and was taken over by another bank. My account was insured, thanks to the FDIC, and the transition was virtually seamless.

But then came the bad news: my Handsome Prince of a checking account was being converted into an ordinary Frog checking account paying virtually no interest.

Understanding and Choosing an Account

I began to look into other banks that offered high interest checking. Compared to Handsome Prince, these are just semi-handsome because of their more restrictive terms. But Handsome is no longer available, so I reconciled myself to looking for the best thing that was available.

Many of the banks and credit unions offering these accounts are smaller, local institutions with few branches. If the accounts are available to people living outside their state or immediate area, they may reimburse you for fees you pay to use other ATMs.

Typical requirements for earning the high interest rate with the current breed of high-interest checking account are 1) making 10 or more signature transactions with your debit card each month, 2) receiving only electronic statements, and 3) having at least one automatic transaction each month, such as direct deposit of a paycheck or Social Security check, or an automatic debit for a monthly bill. Another fairly common requirement is using online bill pay. Accounts may have other requirements. Check the details.

And you may not earn that high rate on your entire balance. One account I read about only paid the advertised rate on the first $500 in the account, but another paid it on the first $30,000. Say you keep $20,000 in the account year-round, and earn 3.5% interest on the entire balance. That's $700 in interest. That's bigger than the raises most people got last year! But if you keep an average balance of $5,000 and only qualify for the higher rate 4 months out of the year because you keep forgetting to use your debit card, you'll only earn $58. You must predict whether you will consistently qualify for the higher interest, and decide whether the interest you might earn is worth the effort.

So how does a person choose the right checking account? Think about how you use the account, and choose an account that fits your needs. Below are some examples.

Jack often has less than $200 in his account, and he frequently takes cash out using the ATM. He doesn't have Internet access.

Jack will probably do best with a "basic" checking account with no minimum balance requirement from a bank that has lots of branches that are conveniently located for Jack to use their ATMs.

Melinda pays for everything using her debit card, because she's sworn off credit cards. Using credit, she didn't control her spending, and she is trying to pay down her balances. She likes the idea of managing her account online, and her employer offers direct deposit.

Melinda probably meets the criteria for a high-interest checking account. But she won't get much financial benefit from it unless she keeps a substantial balance in the account. For now, she should focus on paying down her credit cards and keeping just a reasonable emergency fund in a checking or savings account.

Monroe plans to retire in a few years. He's building up cash reserves to supplement his Social Security check for the first few years of retirement. He's thinking of putting that cash into a ladder of CDs that will mature in years 1, 2, and 3 of his retirement – making the money available as he needs it. But CD rates are so low now, he's open to other strategies for getting a better interest rate.

Monroe could be a perfect candidate for a high-interest checking account, if he meets the criteria (debit card transactions, one automatic deposit or debit per month, electronic statements, etc.) But he may exceed the balance on which the account will pay the high rate. If that is the case, he should keep the remainder of his cash in another account such as a CD or money market account. He should also be careful not to exceed the amounts insured by the FDIC (most bank accounts) or NCUA (credit union accounts) at a single institution.

Where to Find High Interest Checking Accounts

There are several online sources for tracking down high-interest checking accounts. CheckingFinder.com focuses on smaller, local banks offering similar accounts designed by BancVue.

You can find both banks and credit unions offering high interest accounts from Bankrate.com's 2010 High Yield Checking Study.

Yet another source is depositaccounts.com, which was referenced by Consumer Reports Money Adviser in January 2010 issue.

Each of these sites provides the interest rate, the requirements to qualify for the high interest rate, the balance on which it will be paid, and the geographic locations where the account is available. But be sure to verify all of that information directly with the bank or credit union before opening an account.

The lists on each site are different; the account that is most appealing to me was only listed on one of the three sites. My next step is to go to the bank's website (or call them) and make sure that the information is current, before I open an account. Then, I'll have to deal with changing my direct deposit and train myself to track how many times I use the debit card each month.

What's your take on these accounts? Click on my name below and send me your comments. I'll post the most interesting ones and reply to them in a future blog post.



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