Lessons for Yield Chasers
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Let's face it: It's not a friendly financial environment for anyone looking to earn income from liquid accounts. With the federal funds rate set to hover around zero percent to 0.25% through 2014, the outlook is grim for yield chasers.
The results of Bankrate's 2012 High-Yield Checking Survey do show signs of hope, but there are hurdles throughout the pursuit of increased earnings. From adjusting your banking routine to monitoring your rates and more, capturing that yield will take some work.
Before you open a new high-yield checking account, consider these four warnings.
Your Rate Can Change at Any Time
The interest rate on your high-yield checking account is not part of a long-term contract.
While some banks and credit unions are offering above-average yields, every high-yield checking account comes with a dreaded disclaimer: Rates are subject to change.
"Interest rates on deposit accounts can change based on several factors, most importantly, market volatility," says Karen Perlman, chief marketing officer at Chicago-based MB Financial Bank.
Regardless of why rates may change, federal Regulation DD states that there is no requirement to alert account holders if and when banks make adjustments to variable-rate accounts.
"The interest rates for high-yield checking accounts can change at any time," says Greg McBride, CFA, senior financial analyst at Bankrate.com. "There is no guarantee that the yield you sign up for today is the yield you'll still be earning tomorrow."
Accounts Carry Many Requirements
Unfortunately, you can't simply park your cash in a high-yield checking account and watch it grow.
McBride says high-yield checking accounts traditionally come with additional requirements that help the bank reduce costs or generate revenue. McBride says these requirements generally fit into three categories: using your debit card, arranging direct deposit, and enrolling in online bill pay and paperless statements.
"You have to be comfortable with these requirements," McBride says. "If you fail to meet them in a given month, your yield will drop significantly to that of a standard checking account."
If maximizing your yield potential is your primary goal, the trick is to keep that balance as high as possible even while using it as your everyday spending account.
"The savviest use of these accounts is consistently arranging a direct deposit that replenishes any money you've spent throughout the month," McBride says.
The Sky Is Not the Limit
While the Federal Deposit Insurance Corp., or FDIC, insures bank accounts up to $250,000, high-yield checking accounts pay accelerated rates on a much smaller portion of those funds.
McBride cautions consumers browsing for a new financial home that high-yield checking accounts typically only earn accelerated interest rates on balances below $25,000. In some cases, he says that threshold is even lower. According to Bankrate's 2012 High-Yield Checking Survey, the accounts with the highest yields all had balance caps of $15,000 or less.
A couple of institutions fall well below the average threshold, too, only paying interest on the first $500 or $1,000 in the account. Rather than opening a new account as soon as you see an advertisement for high interest rates, you can estimate your monthly earnings based on how much you will deposit.
"You have to calibrate the yield you're getting with the balance that you plan to keep in your account," McBride says.
The Interest Rate Isn't Everything
The interest rate may seem like a golden ticket to additional income, but your banking relationship relies on more than earning easy money.
"Consumers should definitely consider convenience," Wells Fargo spokeswoman Richele Messick says. "If you use bank branches or ATMs, does the financial institution you are considering have locations that are convenient for your daily life?"
While earning a sizable yield is something to celebrate, Messick also recommends browsing the institution's offerings to determine if you will be able to take advantage of services such as personal financial management tools or mobile banking.
Outside of technology, the evolving world of bank fees should stay on your mind, too.
"Earning interest is certainly something to consider, but consumers should also be aware of their spending habits, average balance and any fees associated with an account," Perlman says.