Money

Jean Chatzky on how a high-yield checking account may be right for you

You work hard for your money, so have your money work hard for you.

It’s a principle we often apply to long-term investing, but it can be applied to your short-term savings, too. Some 21 checking accounts, offered by U.S. banks and credit unions, currently yield 2 percent or more, according to a new report from Bankrate.com. Compare this to the average money market account, which currently yields 0.11 percent, and you start to see the potential to earn hundreds of dollars — if not more — by making a switch.

Is this a smart move for everyone? Not necessarily. High-yield checking accounts often come with high maintenance.

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“It only works if you can meet the requirements on a consistent basis — using your [debit] card at least 10 times a month, using online statements, online bill pay and direct deposit,” says Greg McBride, CFA and chief financial analyst for Bankrate.com. (These are the common monthly requirements.) “You might as well be paid for the things you’re already doing, but if you have to train yourself, it’s not something that’s going to work for you.”

Here, five considerations before making a switch:

Default Rates Are The New Fees

Unlike traditional high-interest checking accounts, which often come with fees for not hitting the monthly requirements, the difference between meeting the requirements versus not meeting them can be reflected in your yields. Don’t meet them, and instead of earning 2 percent on your money, you'll earn anywhere from 0 percent to .25 percent (the most common is .05 percent), says McBride.

Balance Caps Affect Gains

Don’t just fall for a high-yield alone. Look at the yield in conjunction with the balance cap — the cap on which the yield is paid — so that you can maximize your interest earnings. Depending on how much you’re looking to deposit, it might not mean going with the account that has the highest yield, explains McBride.

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“The top yielding account in the survey (from Northpointe Bank) had a balance cap of $5,000 and paid 5 percent. Again, that’s great if you’re only looking to deposit $5,000," McBride said.

But if you're looking to deposit more, an account with a higher maximum may make more sense.

Rate Leaders Can Change

When shopping around for high-yields, Ken Tumin, founder and editor of DepositAccounts.com, says to remember that yields can change: “Monitor interest rates and don’t assume that a rate leader will remain a rate leader.”

McBride, on the other hand, thinks the concern of rate leaders is overplayed.

“We’ve seen yields come down over the years just as interest rates have come down, but the average yield has barely budged in recent years," he says.

(So far, the average yield in 2016 is 1.65 percent, and it was 1.66 percent last year).

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“If the institution you open the account with suddenly cuts or limits the yield, it’s still liquid money,” says McBride. “These are federally insured banks and credit unions; you have the same exit clause.” In other words, you're not locked in.

Keep Both Doors Open

That said, don’t close one checking account before opening and starting to use another. The transition can (and should) be a slow one so that you can update the information on all of your automated payments and direct deposits, says Tumin. If you haven’t done an audit of your automated payments — including subscription services — in a while, then consider a service like Trim, which finds all of your subscriptions (by auditing your credit and debit card statements) and canceling the ones you don’t want.

Treat It Like Your Savings

It might be a checking account, but the savviest way to use high yield checking is to treat it like a savings account.

"This is not a replacement for your existing checking account, but a supplement for your current savings,” says McBride. The goal is to boost your earnings. You don’t want to treat it like your everyday checking account, but you will want to meet your transaction requirements, so use your debit card for 10 coffees (or other small purchases) every month and keep your balance high.

--- with Kelly Hultgren

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