New High-Yield Accounts Come With Plenty of Restrictions

Updated on December 11, 2008. 

WITH THE FEDERAL RESERVE cutting rates eight times since September 2007, the days of tidily earning 5% on your cash appear to be a thing of the past. Since last June, yields on online savings accounts at HSBC and Emigrant Direct have dropped from just over 5% (among the highest yields at the time) to 3%. The returns on high-yield savings and money-market accounts are even more meager — averaging just 2.30%, according to Bankrate.com.

But there's a small segment of the banking world that is bucking this low-yield trend. Some little-known community banks and credit unions are offering accounts that carry yields as high as 6.10%. Better yet, these so-called reward checking accounts (they're also referred to as maximum earnings accounts) have no monthly fees, and deposits are insured by the FDIC or its credit union counterpart, the NCUA. In order to earn these higher annual returns, however, account holders must meet certain criteria each month, such as paying bills and banking online, using direct deposit and making a set number of debit card transactions.

These banks aren't just being generous — reward checking and maximum earning accounts are one way that the smaller banks are trying to weather the current economic downturn, explains Aaron McPherson, a practice director at Financial Insights, a financial services market researcher. Not only does the bank attract new deposits at a time when many consumers are draining their accounts to settle debts, but it also profits from the monthly requirements it imposes on these accounts. Each debit transaction generates merchant interchange fees, for example, while a paperless account reduces costs.

"[The banks] may not in fact be making much money, but they feel they have to offer these accounts to hang onto consumers," says McPherson. "This is a loss leader to sell you on other products and a long-term relationship with the bank."

Although the high rates are tempting, questions remain about the value of such accounts for consumers."A checking account is like a spouse: You need real compatibility," says Greg McBride, senior financial analyst with Bankrate.com. Some consumers will find it easier to work within the confines of such accounts than others. Adds Rob Shevlin, a senior analyst with market researcher Aite Group: "There are just so many rules, requirements and restrictions."

Here's what you need to consider before abandoning your current account for a reward checking or maximum earning account:

"Rates are not going to stay at 6%," warns Jim Bruene, publisher of Online Banking Report. Most banks began marketing these accounts before the Fed took an ax to the federal funds rate. As reward checking accounts become more popular, odds are good that these smaller banks will have to lower their yields to retain a profit. At the same time, big bank chains are already muscling in on the market.

Fail to meet just one of the many conditions of your account, and you'll earn a significantly lower rate on your balance for that month. At Arkansas-based Heartland Community Bank, the rate of 5.06% drops to 0.30% if you don't make at least 10 debit transactions and one automatic deposit or online bill payment, among other conditions. "That may not be a fun game for you to play," says Bruene. "Is that something you want to be thinking about each month, making sure you make a dozen debit transactions to get a few extra bucks in interest?"

Because most banks limit access to reward checking options to in-state residents, where you live will determine just how good of a rate you can get. For a list of the highest-yield accounts, visit Money-rates.com.

A major disadvantage to banking with an independent bank is that they have fewer ATMs. "If you're an ATM junkie and you don't plan your cash needs, you could find yourself losing that extra interest — and then some — in ATM fees," says Linda Sherry, a spokeswoman for Consumer Action. Look for rewards checking that offers reimbursement of these fees. Colorado-based New Frontier Bank, for example, refunds all ATM fees customers pay to other banks.