Apologies to Dickens, but if you were to write a novel called "Rate Expectations" right now, it would be almost as melancholy as the original.
Before the recession, earning 2% on your cash would have been unacceptable. But in an economy where it's nearly impossible to find a savings account that can even hit the single digits, earning an average of 2.05% on high-yield or rewards checking represents a rare opportunity to keep your cash safe and earn a decent return.
"For consumers who can routinely meet the requirements, high-yield checking accounts are a slam-dunk cash investment," says Greg McBride, CFA, senior financial analyst at Bankrate.com.
Bankrate's 2012 High-Yield Checking Survey shows yields have fallen along with other deposit rates since last year, when they averaged 2.56%. But at 2.05%, they still handily beat the money market account's 0.13% average yield.
'To-Do List' for the Highest Rates
Customers will likely find stiff requirements to get high yields on checking, McBride says.
For starters, Bankrate's survey found almost all accounts require customers to make a minimum number of debit transactions per month to qualify for a high yield. The most common minimum was 10 transactions, although some accounts require as many as 15 debit transactions.
Beyond debit transactions, terms varied. Although many banks are increasingly allowing customers some choice in how to go about meeting their requirements, 93% require one monthly direct deposit, bill payment or automated clearinghouse, or ACH, withdrawal to earn the high yield.
"Where we have seen greater flexibility is on the permissible interchangeability of things like direct deposit, bill payment and ACH withdrawals, rather than having firm requirements that you have to do a certain number of bill payments and direct deposits," McBride says. "Increasingly, it is an either/or situation."
Should you fail to meet those requirements, watch out. Your interest rate will drop to an average penalty rate of 0.08 %, down from 0.11% last year.
If you can avoid dropping down to the penalty rate, "the yields easily trump anything that you are going to find in terms of online savings accounts and certainly money market mutual funds," McBride says. "The key is: Can you meet the requirements each and every month?"
Limits on What You Can Earn
Skeptical consumers are probably asking themselves why a bank would offer such a high yield on a lowly checking account.
To begin with, the amount of money on which you can earn a high rate is usually capped, limiting their potential payoff for account holders. The most common cap is $25,000, but the highest-yielding checking accounts set the cap at $15,000 or lower.
Those shopping for high-yield checking accounts should keep those limits in mind. "Consumers need to calibrate the amount of money that they are going to put into one of these accounts with the yield and balance cap so that they can maximize their interest earnings," McBride says.
Because of those limits, many high-yield checking account holders use them to hold medium-term savings they may need to access quickly, such as emergency funds, rather than putting it in larger pots of long-term savings, says Hank Israel, a partner with New York-based financial services consulting firm Novantas.
"'Today money' is how I pay my bills and make day-to-day purchases in up to a 30-day window," Israel says. "I am primarily keeping my 'tomorrow money,' if you will, in that (high-yield checking) account."
Why Put High Yields on Checking?
But even with those caps in place, high-yield checking account customers stand to earn more than $500 in interest per year on some accounts should they meet all the necessary conditions and keep a high balance in place. So why are banks slapping their highest yields on checking these days?
From the perspective of banks, the value of high-yield checking deposits can be attributed to its "stickiness," or the tendency of customers to stay with a bank for a long time.
"We know that a customer who transacts more than 10 times a month, the duration of that account is significantly longer than someone who transacts less," Israel says. "The recurring usage of transactions creates a stable relationship."
Also, because of the legwork involved in switching direct deposit and bill-pay arrangements to another bank, it's simply harder to move a high-yield checking account, and that sets it apart from savings and certificates of deposit.
"If you look at what we call, 'hot money,' which is people who jump from rate to rate, it's not sustainable revenue. So why run a CD promotion or something like that?" Israel says. "The runoff on that is much higher than if I have an engaged customer with a checking account."
That means banks can depend on that money to be there when they need it to finance a loan or strengthen their overall financial position, Israel says.
According to McBride, the fees banks get from debit card transactions also help offset the cost of paying you interest.
"The whole idea of them paying these higher yields is that they want to bring in deposits at a low cost and generate revenue from things like debit card transactions," McBride says.
As a result of these advantages, high-yield checking account holders still enjoy a reasonable return, despite the falling-rate funk that has overtaken U.S. deposits.
"Yields have come down on every other cash and fixed-income investment," McBride says. "Where (high-yield checking accounts) are the exception is the fact that the yields are still so far ahead of other alternatives, provided that you can meet the requirements of them on a consistent basis."