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Keeping your money in a checking account offers protection against theft and gives you the convenience of a debit card. But that's usually all it does. Unless you have a high-yield checking account.
A high-yield checking account can actually earn a better return than a savings account while still giving you easy access to your money.
High-yield checking accounts are now offered by dozens of financial institutions across the country. These banks that that offer these type of accounts are usually smaller institutions that want to attract customers who will make big deposits. And most allow the entire application process, and all your account management, to be completed online.
Here's how a high-yield checking account works, and why a switch may be a good move -- if you're eligible.
High-Interest Checking Account Basics
A high-yield checking account earns an annual percentage yield (APY) that is usually calculated using interest compounded several times per year. This means your balance will grow faster than with an annual percentage rate (or APR). And interest rates on high-yield checking accounts are often competitive with online high-yield savings accounts.
This means that a high-yield checking account will earn you interest that beats the rate on typical savings accounts by up to 5 times.
The catch is qualifying for a high-yield checking account.
There are usually strict requirements to be eligible for an account, including a minimum balance, living in a certain geographic area, or giving up the convenience of nearby branches in the case of an online bank.
Requirements vary a great deal between banks. One financial institution may require a minimum balance and making at least $250 in debit purchases each month with a monthly cap on $25,000. While another may have no cap on the balance on which you can earn a high rate but require a much larger deposit.
Common Requirements for a High-Yield Checking Account
Here are the most common requirements you will see. Make sure you understand each requirement and your responsibilities to earn the highest return on your balance.
Most financial institutions place a limit on the balance on which you can earn the high interest rate. These caps can range from $500 to $25,000. Anything over the limit will not earn interest and is better off in another interest-earning account or investment.
Minimum Debit Card Transactions
More than 90% institutions require making a certain number of debit transactions every month to get the maximum APY. Most banks require just 10 transactions per month; however, some require as many as 15, or as few as one.
These debit transactions are important to banks as they generate revenue from interchange fees charged to merchants, while discouraging people from using checks (which cost banks more to process).
Banks usually reduce expenses associated with high-interest checking accounts to fund the high interest rates. This may mean you need to sign up for direct deposit and automatic bill pay. Some may charge you fees for using an ATM - but most will actually cover all ATM charges.
Many institutions only offer digital access with no branch access for these accounts. Though for some who have been in a bank branch lately, this may be an improvement.
Regardless of which bank you choose, you will have a debit card and check writing capabilities. As well as the ability to transfer money to other accounts electronically. Which means that you will always have a convenient way to access your cash.
If you don't meet the conditions of the high-yield account, you will usually earn a very low APY of 0% to 0.25%. This helps subsidize the cost of the accounts to the banks as they know many people who sign up for a high-yield checking account will not meet the requirements each month.
The good news is that even if you slip occasionally, your rate may still be better than what your savings account earns at the local branch of a mega-bank.
Best High-Yield Checking Accounts
Bankrate compiled a list of high-yield checking accounts that can help you find local credit unions that may offer a better APY.
But if you are interested in finding an online high-interest rate checking account, here are some of the best one available nationally with an APY of at least 1% (and some much higher):*
- Northpointe Bank with a 5.0% APY with a $5,000 balance cap.
- Quachita Independent Bank: 3.01% APY with a $15,000 balance cap.
- Main Street Bank: 2.25% APY with a $25,000 balance cap.
- Cross Keys Bank: 2.05% APY with a $10,000 balance cap.
- All America Bank: 1.5% APY with a $10,000 balance cap.
- Heritage Bank: 1.25% APY with a $25,000 balance cap.
- Consumers Credit Union: 3.09% APY with a $10,000 balance cap.
- Lake Michigan Credit Union: 3.0% APY with a $14,999 balance cap.
- Great Lakes Credit Union: 3.0% APY with a $10,000 balance cap.
- CapEd Federal Credit Union: 2.5% APY with a $10,000 balance cap.
- Advantage Plus Federal Credit Union: 2.05% APY with a $15,000 balance cap.
* All data accurate as of July 8, 2016
Is a High-Interest Checking Account the Right Move?
If you can meet the minimum balance requirement, there's no reason not to switch to a high-interest checking account.
Nearly anyone can benefit from this type of account, especially people who want to keep more cash handy for daily expenses and people who want to avoid risky investments such as seniors on a fixed income.
Even if you occasionally have trouble meeting the minimum requirements (such as not making enough debit transactions), your balance may still earn interest. It might be at a lower rate, but still one that is very competitive compared to what is offered by the big banks.
And like the big banks, you can rest assured that your deposits are safe with these banks. All accounts we recommend are with banks that are FDIC insured.
The key to succeeding with a high-interest checking account and potentially earning hundreds in interest every year is balancing your balance to keep it as close to the maximum as possible without going over.
Personally, I have been using high-rate online checking accounts for years. I never use a bank branch, and do not miss them. Plus, I enjoy earning much higher rates of interest on my checking account. All without the inconvenience of needing to constantly move money between savings and checking accounts.