Banks Make Out on Rewards Checking

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Bank investors are so desperate for a decent return on their money that more and more of them are turning to rewards checking accounts. True, you can get interest rates of up to 4% on rewards accounts, but there are some hurdles you have to clear to cash in.

But hurdles or not, the demand for bank rewards checking programs are on the rise. Money-Rates.com reports that the average U.S. personal checking account held $4,621.05 in December 2009. But the average rewards checking account holder has an average monthly balance of $7,700, according to DepositAccounts.com.

If you’re getting 4% or even 5% in interest from your rewards checking account, as many banks offer, that’s a significantly larger return than you’d earn with a traditional checking account.

Let’s take a look at the numbers: According to the BankingMyWay Weekly Interest Checking Rate Tracker, the average checking account interest rate is a paltry 0.132%. But a recent study estimates the average bank rewards checking account pays an average of 3.3%, and many banks pay better rates than that.

Bank rewards checking accounts also usually offer decent perks like free ATM transactions and free checks. They’re mostly covered by the Federal Deposit Insurance Corp., as well.

But then there are those hurdles. Banks use the high-interest gambit to force customers to trigger fees and revenues toward banks in other ways. For example, most bank rewards deals come with a caveat: the customer has to make a minimum number of debit card transactions each month to remain qualified for the higher interest rate. It’s no coincidence that every time you use your debit card, your bank collects an “interchange” fee that goes right to its bottom line.

The data shows that bank checking rewards customers use their debit cards a lot — thus triggering more interchange fees for banks. According to DepositAccount.com, the average reward checking account holder makes about $900 worth of debit purchases every month. The Web site pegs the average interchange fee at about 1.75% per transaction. At an average of $900 made in debit card purchases by the average checking rewards consumer, banks would earn $15.75 per month on interchange fees alone — or $189 per year.

That $15.75 cuts into the “interest” earned by bank rewards customers every month, so while banks may well be paying 4% or more in interest to their checking rewards customers, they’re getting a good chunk of it back in interchange fees alone.

That’s not necessarily bad news for the consumer — unless you don’t meet the minimum debit card transaction requirements laid out by banks. If your bank mandates 10 debit card transactions per month, and you only make eight, you can wave “bye-bye” to that great rate — most banks knock the interest rate back down to the 1% range when you fail to keep up.

But if you can handle the monthly debt card mandates, then the higher rate — along with the satisfaction of getting a good deal in a tough economic environment — is all yours.

After all, they don’t call it rewards checking for nothing. Like most rewards, you have to earn it.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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