Reward checking accounts offer above market interest rates, higher than almost any other bank deposit account, if you can satisfy their requirements.

A typical reward checking has three or four of these requirements:
– 10-15 debit transactions within a statement period
– electronic paperless statements
– at least two bill pay transactions per statement period
– at least one direct deposit per statement period

In addition to those requirements, you only earn the higher rate for a portion of your balance. Usually the cap is set at $25,000, so you only earn the higher rate on $25,000 of your deposit.

A reward checking account can offer such high interest rates because their requirements generate income for the bank (they beat even the most generous of CD rates). Specifically, the debit card transactions generate the bulk of the income. Whenever you use the debit card to make a purchase, the bank collects fees on the transaction. Your above-market interest rate is funded by those fees.

The electronic paperless statements are a cost cutting measure and the bill pay and direct deposit merely make the account harder to change. If you’re paying two bills and getting your paycheck deposited each month, it’s a bigger pain to switch banks.

Best of all, they’re FDIC insured up to $250,000!

Are they worth the hassle? Let’s look at on eexample. Bank of the Sierra Reward Checking Account offers 4.51% APY on the first $25,000 as long as you make 12 debit card transactions, one bill pay, and one direct deposit. Your balance above $25,000 earns 1.01% APY, which is probably better than your standard checking account. If you fail to satisfy the requirements you earn only 0.12% APY, which, I would guess, is still better than your standard checking account!

(This is not an endorsement of Bank of the Sierra)

So they seem to be worth the hassle, if you can get enough transactions. Do you have a rewards checking account? Any words of wisdom?

Jim writes daily about money at his personal finance blog, Bargaineering.com.

(Photo: cutiemoo)

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