How to Earn 6% on Your Cash

At a time when consumers can barely squeeze out a 2% yield on their savings, offers to earn 5% or 6% -- on a checking account, no less – may sound downright sketchy.

Yet, those rates are being offered now on checking accounts at a growing number of community banks and credit unions. These so-called “rewards” accounts were once offered by a scattered few banks, but they are becoming increasingly common, says Randy Rosen, manager of deposit research at Informa Research Services, a market research firm that has tracked bank deposit rates since 1983.

There are few factors driving the popularity of rewards-checking programs among banks. First, the way rewards checking accounts are set up can actually be as good for the bank’s bottom line as it can be for the consumers who qualify for the high yields, Rosen says. Rewards account holders are twice as profitable to banks as account holders who have regular, free checking accounts, according to BancVue, an Austin, Texas-based company that helps community banks and credit unions set up rewards-checking accounts. These account holders not only keep higher balances ($3,900 to $13,000, compared with just $750 to $1,600 for free-checking account customers), but they also stick with the product twice as long, according to BancVue. On average, rewards-checking accounts generate $450 in annual profits for the bank, compared with $200 for free-checking accounts.

Rewards accounts can also lure in customers who might open additional accounts or apply for other profitable products and services. And they can be pitched as an olive branch by an industry whose recent marketing suggests it is trying to win back the trust of its customers.

Still, these accounts can be rewarding for their holders, particularly when compared to conventional interest-earning checking accounts offered by the big banks, whose yields now average just 0.12%, according to Bankrate.com, but also compared to savings accounts, which sport an average yield of 0.23%. Their yields are also significantly higher than those most brokerages offer on their cash-management accounts, or sweep accounts. The brokerage equivalent of a checking account, these accounts yield as little as 0.1% these days, mainly because they invest in money-market mutual funds, says Greg McBride, a senior financial analyst at Bankrate.com. (Still, CMAs can be a convenient alternative for consumers who need a liquid place to park their cash, since they typically come with an ATM card and check-writing ability.)

Even as rewards-checking accounts offer significantly higher yields than other alternatives, they’re not necessarily the right product for everyone. Here’s what you need to know.

To understand why these accounts make more money for the banks than conventional checking accounts, look at their conditions.

Most banks require that customers set up direct deposit and sign up for electronic statements, which helps the bank cut its delivery costs, says McBride. The accounts also have debit-card usage requirements, typically for at least 10 or 12 signature-based purchases each month. They ensure that the bank gets some interchange revenue: an average $6.17 per customer per month, compared with $2.18 per customer per month with regular free-checking accounts, according to BancVue. Fail to meet those requirements in any given month, and the yield you will earn that month drops considerably, to as low as 0.1%.