With yields on Treasurys at all-time lows and cash paying next to zero, some yield hunters are finding solace in a surprising place -- their checking accounts.
Criticized lately for high service fees and excessive ATM charges, checking accounts have suddenly become a haven for jittery investors seeking a safer return. According to a recent survey of 155 banks by 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."
Savers have responded by piling into such accounts. Deposits in so-called "rewards" checking programs offered by these mostly smaller banks and other financial institutions swelled to nearly $18 billion in June, a rise of 5.3% from $17.1 at the end of last year and up from just $100 million in 2005, according to BancVue.com, a retail banking provider for community financial institutions. Experts say many of these smaller banks and credit unions can afford to offer aggressive rates and still be profitable because their costs are much lower than big banks; they also take fewer risks. "Checking account yields from small regional banks and credit unions are blowing the doors off of those offered by the major national banks," says Ben Woolsey, director of marketing and consumer research at CreditCards.com.
To be sure, these high-yielding checking accounts have some drawbacks. First, many of these banks put a limit on how much of a balance can earn the higher yield. Ten of the 14 highest-yielding accounts surveyed by Bankrate cap the top rate to balances of $10,000 or less. The bank with the highest-yielding checking account of 6.17% -- Seattle-based Boeing Employees Credit Union -- only pays that rate on deposits of $500 or less (the default interest is 0.10% for any balance above that). Todd Pietzch, a spokesman for the credit union, says the high rate is meant to "get members on the path of saving."
In some cases, banks also require that account holders meet certain criteria often including making about 10 debit transactions per month or using online banking and direct deposits in order to receive the better yields. For example, Capital Bank of North Carolina, which has $1.7 billion in total assets, offers a 4.01% yield on its "smart checking" checking account, so long as participants each month: make one direct deposit; do 10 debit or check-card transactions; view statements online; and keep a $500 or more average monthly checking balance. Failure to meet the requirements drops the interest rate down to 0.10%. A bank spokesman cited the requirements listed online, which states earning the rewards are "simple."
Because of all the many hoops, Richard Barrington, personal finance expert at consumer information site MoneyRates.com, doesn't advise people to change their shopping or banking habits to fit the terms and conditions of high-yielding checking accounts. "When you start manipulating your financial habits just to qualify for that kind of deal and start spending more money than you intend, that's when you can run into trouble," he says. "It's not a coincidence that many of the restrictions involve a certain amount of debit card transactions. Banks still make a good amount of money from overdraft fees."
Still, for those savers willing to meet the requirements, here are three banks that are currently offering sweet yields to consumers living anywhere in the U.S.:
The Community Bank of Pleasant Hill (Mo.), which has $44.7 million in assets, has a "rewards checking" account offering 2.51% interest. Customers need only $100 to open an account, and must have at least one monthly automatic direct deposit or auto debit, as well as sign up receive e-statements. There are no maintenance fees, and the account offers free online banking and bill paying. Above $25,000, the annual interest rate drops to 0.50%.
Consumers Credit Union, headquartered in Lake County, Ill., which has over $550 million in assets, offers a 4.09% annual percentage yield on its "rewards checking" account on balances up to $10,000. Customers must make 12 debit transactions per month, make one direct deposit (or one automatic debit) or pay one bill using the online bill payment system, enroll in online banking and receive e-statements. There's a $50 minimum opening deposit. Customers must also open a savings account with a minimum of $10. The credit union is not restricted by geography or employment, and is open to anyone who wants to be a member, and you can apply online.
West Texas National Bank, headquartered in Midland, Tex., which has around $680 million in assets, has an "ultimate checking" account with 2.01% interest that requires $100 minimum to open and 10 check card transactions. Customers must use e-statements and access online banking. The interest rate falls to 0.25% for balances over $25,000, or if conditions are not met. The account offers no monthly fees, free checking, as well as free online banking and bill pay.