Online checking is a good option
Money market funds, CDs and other accounts that used to offer large returns are now only offering 1% interest. Laura Bruce of Bankrate.com discusses whether high interest online accounts come with a risky catch.
Cutting a check (iStockPhoto.com)
TEXT OF INTERVIEW
Tess Vigeland: We get questions from you almost daily asking where's a safe place to park your cash where you can get more than, say, a penny-on-the-dollar return. Not easy to find these days.
Money Markets, CDs and savings accounts are offering pretty much just that -- about 1 percent interest right now. And they're bragging about it. Such a deal.
So when I saw an account paying 5 percent I thought, Eureka! It was an online, high-interest checking account. There are lots of them out there right now paying 3 to 5 percent.
Laura Bruce is a senior reporter at Bankrate.com. And I have to ask you, as with anything promising high returns, what's the catch?
Laura Bruce: There really isn't too much of a catch today. I think that a lot of people do the kind of behavior that these banks want. They want you to use your debit card, usually about 10 times a month, and also take electronic statements and have either a direct deposit, or something like that -- like you're going to do at least one electronic bill pay per month. So, you know, they're trying to get people to adapt certain behavior because they make money off of all of those things.
Vigeland: How are they making money off of your debit transaction?
Bruce: Well, there are fees. It's just like using a credit card. You know, there are transaction fees kind of behind the scenes that are charged to the merchant, etc. And so they make money off of that. And of course now, if you get an electronic statement instead of getting one through the mail every month, that saves them anywhere from $1.50 to almost $3 at some banks.
Vigeland: I noticed when I went and looked at some of these high-interest checking accounts that a lot of them are banks I've never heard of, and they're a long ways from me. They are FDIC insured, but are there any risks to that for me as a consumer?
Bruce: Well, it's a great question. I don't think that there are. I mean, yes, if you look at the list of banks that have failed, they're usually the smaller banks. But they are FDIC insured and so you will get your money back, your deposits, as long as you stay within the FDIC limits. Now, these reward checking accounts, for the most part, they only pay these great interest rates on a certain balance. Many of them cut it off at $25,000. Some actually go up to as much as $50,000. So you're going to be well within the FDIC limits. Now, if you decide to open up other accounts at that bank -- a CD account or something like that -- then you may have to pay attention to the limits to make sure you're covered.
Vigeland: For the high-interest checking account, you get the high-interest figure -- say the 4 or 5 percent -- up to say $25,000. And then any of the rest of the money that's in your account beyond that gets a lower interest rate. That's exactly the opposite of most savings accounts.
Bruce: These institutions can't give you that kind of yield up to $250,000. So they cut it off at a certain point. In this case, once you get past that $25,000 or $50,000 limit, you're going to go back to whatever their standard interest rate is. Right now, most of them, it's below half a percent.
Vigeland: And as long as, again, just to reiterate, that there are things that you have to do in these checking accounts -- the number of debit transactions, direct deposit, that sort of thing.
Bruce: Yeah, and if you don't you will pay a penalty, because any month that you don't take care of all those requirements, you're going to get the regular interest rate for that month. And if you go back the next month and you do the 10 debits, or 12 debits, whatever it is, and what not, then you'll go right back to the high yield. The idea is that these are high-yield accounts. They're permanently meant to be high-yield accounts. So while the yield will fluctuate, and it may drop at times, it's always going to be higher than what you get elsewhere.
Vigeland: Laura Bruce is a senior reporter for Bankrate.com. Thanks so much.
Bruce: Thank you, Tess. Good talking with you.
Comments
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From Denver, CO, 04/06/2009
www.checkingfinder.com is by far the best place to find Reward Checking accounts with rates up to 6%. I opened one of these checking accounts about 6 months ago. It was super easy and the rate hasn't changed much. The conditions are really easy to meet, i'm doing what I normally did at the big banks and i'm being rewarded for it. Pretty cool concept!!
From NYC, NY, 04/06/2009
Try www.checkingfinder.com
From Menlo Park, CA, 04/04/2009
I looked up internet based interest paying checking accounts on bankrate.com. The highest APY of the 4 banks was 1.02. What is Laura Bruce talking about when she says you can find 5% APY internet based checking at bankrate.com?
From NY, 04/04/2009
if you want to learn more about the markets and specifically money markets check out http://moneyneversleepsblog.blogspot.com/2009/04/money-market-mutual-funds.html
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