Question: Hi Chris, maybe this is a basic question, but I am confused. I have a high-yield checking account with my bank (3.5% apy) that also pays up to $15 in ATM fees/mo. I look online at interest rates for savings accounts and they are all pretty much zilch. Am I missing something? I thought a savings account should be more rewarding for some reason. Could it be because I have a cap on how much can be in the account (<$25K)? Thanks in advance. : AJ, Ames, IA
Answer: It's a good question. You would think a savings account would pay more. However, you have a lot of flexibility with your savings account. The higher interest rate on a high-yield checking account comes with the restrictions and requirements.
The terms on these accounts vary by institution. But almost all require a certain number of debit card withdrawals a month, direct deposit, and automatic bill paying. Committing to these transactions with your bank ties you more closely to it. And you're right, banks typically limit how much you can have in the account and earn the higher rate.
Here's a Bloomberg BusinessWeek story from June 24th on the accounts.
The so-called high-yield checking accounts earned an average 2.56 percent compared with 3.3 percent last year, Bankrate.com said today.
"It's a slam dunk," for savers who can meet the requirements, said Greg McBride, senior financial analyst at Bankrate.com, a unit of Bankrate Inc. "It's an easy way to raise the yield on some of the cash portion of your portfolio."
To earn the top interest rate, consumers generally must meet monthly requirements such as one direct deposit or automated payment and 10 debit-card transactions, according to the study. The required debit-card purchases are the "biggest hurdle," for consumers, McBride said. Savers who don't meet the requirements in a given month earn an average of 0.11 percent, he said.
Bankrate.com is a good place to go and find out the different terms of high-yield accounts. The bottom line: It takes banking discipline to take advantage of a high-yield checking account and if that's you, it's a good deal.