Getting Paid to Play: High-Stakes Checking

Pssst. Hey, kid. Yeah, it’s me, in the trenchcoat. Want to earn 3 to 5 percent interest on your checking account? Well, you can. There’s a catch, of course, but it’s not a big catch, and you don’t have to do anything sneaky. (Trenchcoat notwithstanding.)

Over 600 credit unions and community banks offer reward checking accounts, and nearly 1.5 million customers have signed up. With a typical reward account, you’re required to use direct deposit and e-statements, and you have to use your debit card at least a dozen times in each statement period. Fail to meet the criteria, and you forfeit nearly all your interest for that month.

In return for putting up with this rigmarole, you get around 4% interest on the first $25,000 in the account and around 1% on anything over $25,000. You’re automatically reimbursed for up to $25 in ATM fees per month. No minimum balance is required, and it’s otherwise exactly like a normal checking account, including federal deposit insurance.

“If you use a debit card as often as you tie your shoes, it’s a slam dunk,” says Greg McBride, senior financial analyst for Bankrate.com.

Four percent just for giving your debit card a workout? With “high-interest” savings accounts offering less than 1.5 percent and regular savings accounts offering jack sh—er, even less, reward checking sounds too good to be true.

But it’s legit. Banks make money off reward checking in several ways.

1. Every time you use your debit card, the bank gets a cut of the Visa or Mastercard fee that the merchant pays.

2. The bank attracts new money by offering high rates on new deposits without having to pay higher rates on its existing deposits.

3. Naturally, the bank is counting on a certain number of customers failing to clear all the hurdles and thereby forfeiting their interest for the month. It’s like those mail-in rebate cards you forget to mail in. “That higher interest rate really only applies to a consumer who’s meeting those requirements month in and month out,” says McBride. “For somebody who only meets it half the time, the cost of those incremental deposits isn’t 4 percent, it’s 2 percent.”

4. Reward checking customers keep big wads of cash in their checking accounts, and that’s money the bank can use for loans. According to Bancvue, which provides consulting services to community banks, the average reward checking customer maintains a seven times higher balance than a typical checking customer.

Karawynn Long of Seattle is in the seven-times-higher category. Long, who writes the personal finance blog Pocketmint, opened her reward checking account with Bank of the Sierra last fall. She went from keeping $2000-$5000 in her old checking account to close to $25,000 in her reward checking. “I’m basically using it as a savings account stash for twenty, twenty-two thousand extra dollars,” she says.

Is a reward checking account right for you? “Whether or not this is going to work for you really boils down to whether this is a fit for your financial lifestyle,” says McBride. “If you’re going to have to keep a running tally of how many debit card transactions you’ve done so you can make sure you clear that threshold every month, this probably isn’t going to work for you.”

Long, on the other hand, is making $1000 a year, risk-free, just for parking extra cash in her checking account. “I haven’t actually had to change my behavior,” she says. “We haven’t had to do anything differently or make any purchases with a debit card we wouldn’t ordinarily have done, but it does require a little extra monitoring.”

There is the issue of fraud to consider. The banks promise that customers are fully covered in the event of debit card fraud, and I believe them. But debit fraud exposes you to many dangers and annoyances that credit fraud doesn’t: you may face overdraft fees and not know when you’re going to get your money back. I don’t mean to worry anyone unnecessarily; I would personally feel comfortable keeping my money in one of these accounts, but you have to check in regularly online and be on the lookout for trouble. “It is something that requires you to pay some attention to it, unlike where you just throw stuff into the savings account and never look at it,” says Long.

Low interest rates on CDs and savings accounts have driven the growth of reward checking; the number of reward checking account holders has approximately doubled in the last 18 months, according to Bancvue’s sister marketing company, First ROI. What happens in a few years, when the Fed raises interest rates? Reward checking may become less attractive next to, say, a 5 percent CD, once such a thing exists again. Then again, you have to have a checking account, and any interest on it is better than none.

Matthew Amster-Burton, author of the book Hungry Monkey, writes on food and finance from his home in Seattle.