The Perks and Pitfalls of Reward Checking Accounts

As banks continue to reduce interest rates on their savings accounts, many people looking for a bigger return on their investment are switching to reward checking accounts.

On the surface, reward checking accounts seem more profitable than typical savings accounts, a few among them offering up to 4% annual percentage yields. Their interest rates, however, tend to drop dramatically after the account’s balance reaches a certain cap. Once this cap (usually somewhere between $10,000 and $25,000) is reached, the appealing 4% APY may suddenly decline to a yield as low as 0.25%.

Reward checking accounts thus prove to be much less beneficial than regular savings accounts for customers who wish to invest larger sums of money; $100,000 in a 1.25% APY savings account would still accrue more money yearly than $25,000 in a 4% APY reward checking account. It’s important to keep in mind, too, that 4% is the highest APY of any existing reward program.

Another problem that comes with maintaining a reward checking account is that many subject their clients to monthly requirements and lower the month’s yield to below 1% for failing to meet them. Common requirements include having to use the account for at least ten non-ATM debit card transactions and having to make one direct deposit each month. Account holders also receive only electronic billing statements, though requirements may vary by bank.

If any of these regulations poses a serious problem, then a reward checking account might not be the best option. But for anyone with $25,000 or less to spare, it might be a smarter choice than leaving money in a checking account with no monthly yield at all.