Beat the Fed: How to Earn 4% On Your Checking Account
This post was updated on June 23, 2011
At the risk of pointing out an already painful financial reality, the average checking account is paying a 
barely-there yield of 0.1 percent. And yesterday Federal Reserve Chairman Ben Bernanke pretty much confirmed there is no chance Washington will trigger a rate hike any time soon, given the Fed's statement that it has no intention to raise the Federal Funds rate for "an extended period." But with a small bit of elbow grease, you could soon have your cash earning 40 times the average checking account payout. In Bankrate's new survey of high-yield checking accounts, a handful of banks and credit unions currently offer yields as high as 4 percent.
Yield of Dreams
Bankrate found just 27 banks and credit unions still offering nationally available high-yield checking accounts, compared to 41 last year. Moreover, the average payout among those offering high-yield accounts has slipped to 2.56 percent, compared to 3.30 percent in 2010, a slide you can blame on the Federal Reserve's extended easing. But even 2.56 percent is mighty fine. It's not much less than what you can earn on a 10-year Treasury right now, and with a checking account, you're not exposed to the interest rate risk of a T-note when we eventually pivot to a period of rising rates. Yes, that pivot now seems delayed after the latest Federal Reserve report, but it's delayed, not canceled.
In the interim, you can snag yields of up to 4 percent on your cash. That's even better than the juicy 3.5 percent yield MoneyWatch's Allan Roth recently found on a 7-year CD. Of course, there are trade-offs to consider: With the CD you lock in a rate, while the yield on a liquid savings account can and will fluctuate either because of general rate trends, or a financial institution's change of policy. But a mix of a high-yielding checking account and some of Allan's recommended high-yield (and flexible) CDs is sure to be a profitable mix.
How to Earn up to 4 Percent on Your Cash
Not all the best high-yield checking account deals are nationally available. For example, Capital Bank's checking account pays a fat 4 percent yield, but only for residents of North Carolina. The best move is to take a spin through Bankrate's 2011 high-yield checking survey and see what might be a good fit for your cash. Then make sure you understand all the rules and requirements to actually earn that yield. One very common requirement is that you must be a frequent debit-card user; most high yield offers require that you make at least 10 monthly debit-card purchases to qualify for the lofty yield.
Here are the questions to ask in order to vet a high-yield offer:
How much of my money can earn the high yield? Banks and credit unions typically set a maximum balance that is eligible for its highest yield. That's usually $10,000 to $25,000. But it can be a lot lower. In Bankrate's survey, the BECU credit union offers a too-good-to-believe 6.17 percent yield to residents of Washington state. But it's only paid on the first $500. Above that amount, you earn just 0.10 percent. Basically you're getting a $30.85 enticement to sign up, but after that you'll be earning no more than the average piddly checking account payout.
By comparison, Integrity Bank offers a 4.01 percent yield on deposits up to $25,000. That's a nice $1,000 payout in the first year, or $975 more than you'd earn if you left the money in a checking account earning 0.1 percent. The one catch with Integrity is that you must show up at one of its seven Pennsylvania branches its Houston, Texas location to open the account, though all future transactions can be done online (Integrity also offers free nationwide ATM usage.)
What will I earn on the balance that exceeds the high-yield limit? Many high yield checking accounts continue to offer an above-average yield on any balance that exceeds the amount that is eligible for their highest yield. For example, Consumers Credit Union, open to everyone, pays 4.09 percent on the first $10,000. From $10,000-$25,000, you'll still earn a generous 1.59 percent, and over $25,000 the payout is 0.76 percent. "If you intend to keep more than the maximum that earns the highest yield, be sure to check what the rest of your money will earn," advises Greg McBride, senior financial analyst at Bankrate. "You could be better off opting for a deal that offers you a slightly lower yield on the amount that is eligible for the highest yield, but offers a better deal on the entire amount."
Can I easily meet the debit-card requirement? As mentioned, most high-yield accounts require at least 10 debit-card transaction accounts per month to keep earning the high yield. Fail to meet that threshold and your yield plummets to a default rate, which is typically the standard 0.10 percent. Not exactly a punishment, but still.
Moreover, a new debit-card regulation that goes into effect on July 21 could lead to banks and credit unions increasing the debit-card transaction requirement. That's when large banks and credit unions will see the maximum fee they can charge retailers to process debit card transactions fall from 44 cents to 12 cents. McBride says that might cause a bank or credit union to boost the number of required debit card transactions from, say, 10 a month to 15 a month, in order to help ensure they bring in more revenue from debit-card transactions. "If you're someone who has already made 10 transactions by the third day of the month, you've got nothing to be concerned about," says McBride. "But if you're someone who has to remind yourself at the end of the month to meet the debit-transaction requirement, then this isn't necessarily a slam-dunk option for you."
Is there a monthly fee? While Bank of America is sticking some regular checking account customers with a $12 monthly fee, the good news is that plenty of high-yield offers don't impose a monthly fee. But again, check the fine print. The Capital Bank 4 percent deal available to North Carolina residents can be opened with just $100, but to avoid a monthly $8 service charge, you'll need to have an average balance of $500.
What other hoops must I jump through? In addition to whipping out your debit-card with some frequency, most high yield checking accounts also have a few other stipulations. The most common is a requirement that you have at least one monthly direct-deposit into your account, or pay at least one bill using online bill pay, and that you also agree to receiving online statements. Make sure you read all the fine print so you understand every hoop that must be navigated to earn the high yield.
Photo courtesy Flickr user RLHyde
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