Bank Survey Finds That Interest Bearing Checking Accounts Earn Higher Interest Rates, but You Have to ‘Earn’ the Interest

It looks like interest bearing checking accounts are en vogue for 2011.

According to a Bankrate.com survey, on average, interest bearing checking accounts are earning 2.56% and some banks are offering over 4%. The Wall Street Journal compares the checking account rates to other alternative investments:

Bankrate.com, 57 institutions now offer so-called high-yield or “rewards” checking accounts; twenty-seven of those banks make these accounts available to consumers nationwide. While the average yield on these accounts is 2.56%, down slightly from 3.3% last year, many institutions are paying 4% or more. That compares to 0.2% for the average money-market account and less than 3% for the 10-year Treasury note. “Checking accounts are still the best, highest-yielding place for federally insured liquid cash,” says Greg McBride, senior financial analyst at Florida-based Bankrate.com. “It’s a no-brainer.”

Looking at Consumer’s Credit Union, which was on Bankrate.com’s list of checking accounts earning over 4%, you can see how the bank puts the ‘earn’ in the phrase ‘earning interest.’ Rules for a 4.09% APY include:

Anyone can take advantage of these valuable perks, including new Members. Consumers Credit Union only asks that you help us operate more efficiently by banking in ways that likely are already familiar to you.

• Complete at least 12 Debit/Check Card Point-of-Sale purchases (transactions must be made without using your Personal Identification Number, or PIN, to count towards the minimum of 12 and must posted and clear your account on or before the last day of the calendar month).
• Each caledndar month, one direct deposit OR one ACH debit OR pay one bill must post and clear using Consumers Credit Union’s free online bill payment system
• Access Online Banking at least once each calendar month
• Receive Electronic Statements (enroll + accept the disclosure)

Interest earned also decreases with balances over $10,000. However, the account does not incur fees and your greatest risk, if you should miss one of the requirements, is having the interest rate plummet to .05% (the rate earned on Consumer Credit Union’s savings accounts).
Before you jump in, here are some considerations:

1. Are you willing to jump through the hoops?

The requirements for Consumer Credit Union are standard operating procedure for these high interest accounts. They are stringent to avoid paying the maximum possible payout, while taking advantage of percentages they will earn on your debit card transactions (which are a condition). If you aren’t ready to track, manage and babysit the account, you will waste precious time and fall short on your interest earning goals.

2. Watch the other hand

By looking at some of the requirements, it would seem that banks are using interest bearing checking as marketing tools to bring in new members. It does not appear to be a profit-boosting, fee-driven savings trap that any prudent investor should stay away from. That doesn’t mean that rules are unchangeable. You will want to keep tabs on whether the interest rates and rules for these checking accounts are changed limiting your interest earning potential. Worse yet, if fees are introduced. Get out if they do.

3. Shop around first

I’ve featured an interest bearing checking account from Consumer Credit Union in Illinois. Not all interest bearing accounts are the same.

I took a quick look at the interest bearing checking offered by my local credit unions and found an array of fee traps like minimum balances and menial interest rates. Don’t go local for the sake of having local access. Consumer Credit Union is open to members outside the state. If you are looking to take advantage of interest income, long-distance banking is manageable. The trade-offs for a local interest bearing checking could easily exceed the benefits.

If you have funds sitting around for emergency purposes, these interest bearing checking accounts offer a great opportunity for you to grow the balances, while beating inflation. But, you have to be ready to earn the interest by working for it. These are not the accounts were you can open an account, sit back and watch it grow.

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