Winners & Losers of High-Yield Checking

The term "high-yield checking account" might seem laughable these days, since "high-yield" is likely to mean an interest rate that's merely more than zero though still less than 1 percent. Nonetheless, a checking account that pays some interest can be a good choice for savers who want to earn at least a small return on their money.

The chief advantages of high-yield checking accounts are a slightly higher interest rate compared with a standard checking account, more liquidity than a certificate of deposit and less risk than stocks or bonds, says Chris DesBarres, co-owner of Help Unlimited, a money management service in Winston-Salem, N.C.

"The big reason to have a high-yield account is liquidity," he says. "If you need ready access to your cash, you can't have it tied up in a CD or any other fixed-income vehicle. With the high yield, at least you're getting the interest, but you're also keeping your assets extremely liquid."

Interest rates on high-yield checking accounts are typically pegged to account balances. Keep $25,000 or $100,000 in one or more accounts at the same institution, and you'll score a small interest rate bonus on your checking account, according to rate and deposit information on several bank websites.

Rates aren't negotiable, can change at any time and usually come in tiers that tick up as the balance increases. According to Bankrate data, checking accounts range from 0.01 percent to 1 percent, though there is no universal or prevailing rate. In addition, online accounts sometimes offer higher rates.

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"Generally speaking, the more money you have in there, the better rate you're going to get," DesBarres says.

Minimum Balance, no Monthly Fee

Traditional brick-and-mortar banks tend to offer high-yield checking accounts with monthly fees that can be waived by maintaining a minimum balance or utilizing myriad other banking services. Several debit-card or direct-deposit transactions per month can kill the fee, as can a mortgage, a home equity line of credit or stock brokerage account. However, if you drop below the minimum balance or fail to complete the other services, you'll be hit with a charge, typically $10 to $30 per month.

Kathryn Black, a senior vice presidentat Wells Fargo in Charlotte, N.C., says keeping a lot of money at one institution can mean quite a few benefits in exchange for that wealth and loyalty. Incentives such as bonus interest rates on retirement accounts, free ATM transactions at other banks, free stock trades and discount rates on home loans can be part of a package -- along with a high-yield checking account.

"The checking account itself would not be extraordinarily high yielding but neither would most of the competitive checking accounts in this category. What it does have are a lot of benefits from other products," she says. "The checking account is the core driver for all of those relationship benefits."

Online banks and stock brokerage companies tend to offer high-yield checking accounts with fewer fees and restrictions, but these institutions generally have very few physical locations. That means customers must use the telephone or email to reach a representative. Because these accounts are managed through a website, a mobile banking application and other banks' ATMs, they might not include any printed checks, making the term "checking account" something of a misnomer.

Even if the monthly fee is nonexistent or waived, a high-yield checking account still can involve charges for other banking services. So what can trigger fees?

• Check printing.
• Replacement ATM cards.
• Copies of canceled checks and statements.
• Overdraft protection.
• Cashier's checks.
• Checks drawn against insufficient funds.
• Outgoing wire transfers.
• Stop payments on bill pays or checks.
• Tax levies or garnishments.
• Account inactivity.

These fees can range from a few dollars to as much as $50 per item, according to banking websites. Some accounts also have transaction restrictions, allowing only a limited number of checks, ATM uses or calls to customer service per month.

Rate Bonus May Expire Soon

Many financial institutions offer interest-bearing checking accounts primarily to entice new customers in hopes of locking in their loyalty and cross-selling more profitable products, such as home loans, insurance and investment services to them, according to Justin Krane, president of Krane Financial Solutions, a financial planning firm in Los Angeles.

"The more checking accounts, mortgages, credit cards or whatever that people open, the stickier the client becomes," he says.

Sticky customers are less likely to leave and more likely to utilize more services, generating revenue for the bank over time. Consumers who have thousands of dollars in liquid savings are particularly hot prospects, so much so that banks routinely offer a cash bounty of $50 or a short-term interest rate bonus as an inducement to open a sizable new account.

That higher rate is likely to expire in three to six months. After that, "you're toast," Krane says.

The bottom line for consumers is that high-yield checking accounts offer a better return as long as the relationship requirements are met and restrictions aren't violated.