Ben Todd | Apr 16, 2017 | 3
High-Yield Checking Accounts – Are They Worth It?
I completely understand why some people say that having a high-yield checking account is not worth the hassle, since most users rarely receive any interest from the money they hold in their high-yield checking account. That is not because such checking accounts are a scam; it is simply because most people do not maintain a balance in their checking account for very long. Most will spend the money, put the money towards debts, or invest the money in some manner or another. Few people maintain a positive balance in of hundred or thousands in their checking accounts for very long because more-often-than-not the money is needed or better off elsewhere. This article discusses what a high-yield checking account is, why one may use such an account, and if applying for an interest-paying checking account is worth it.
How Does A High-Yield Checking Account Work?
Most checking accounts do not offer any sort of interest on the balance you maintain in your account. Most checking accounts (also known as debit or current accounts) are used as a tool. You put money in to store it, and you take it out when you need it. They also have the benefit of allowing direct debits, simple money transfers, and so forth. A savings account doesn’t have the same benefits because all you do is store money in a savings account and earn interest. A high-yield checking account has the mixed benefit of all the services that a checking account offers, along with earning interest similar to how a savings account works.
A high-yield checking account may offer an APY, which is an annual percentage yield, and usually it means the interest is compounded. In addition, many companies that offer a high-yield checking account will compound the interest more than once per year, which means you earn interest even if your money is not resting in the account for a full year.
Compounding means that interest is paid on the interest you earn. A flat interest rate of 1% for $100 would pay out $1 in interest each year, so the money would grow as $101 the first year, $102 the second year, $103 the third year. Compounded interest would grow as $101 the first year, and $102.02 the second, and $103.04 the third.
A Short Example Of How It Works
If you maintain a balance of $100 in your savings account for a year, then you will earn interest on that money. If you rest $100 in a checking account, then you will earn no interest on that money. You will earn interest if you rest your $100 in a high-yield checking account for a year. In addition, if the APR is compounded more than once per year, then you may only have to rest your money for six months before earning interest.
Why Do Banks Offer High-Yield Checking Accounts?
A bank, building society, or financial/money company may offer a high-yield checking account in order to entice people in. It is not a loss leader because the bank still makes money, but they tend to offer interest-paying checking accounts to draw you in and to have you place money in their care. That is often enough incentive to offer a high-yield checking account, but they are also hoping to convince you to open a savings account, investment account, and maybe even use their credit facilities for anything from a credit card to a mortgage.
Logic Suggests That Only Smaller Companies Offer Interest-Paying Checking Accounts
If a company or bank has to entice people in with high-yield checking accounts, then logic suggests that they require more customers and that maybe they are a small or unpopular bank/money company.
In my opinion, and from my research, I have to conclude that yes–it is mostly smaller banks and companies that offer high-yield checking accounts. To confirm my opinion, I took at look at this list of high-interest checking accounts and in it I saw small companies and banks with low share prices when compared to their main and local competitors.
Does The Fact That Smaller Companies And Smaller Banks Offer Such Accounts Matter?
In my opinion (again, just my opinion), no it does not because your money should be insured against loss. If the bank or money company is insured by the FDIC (which it should be–but double check first), then you are covered for up to $250,000 if the bank/company goes out of business. The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category.
Smaller banks and smaller companies are more likely to go bust (aka out of business), and you are insured so that the money in your high-yield checking account will be returned to you eventually. There are downsides to banking with a smaller company. They tend to offer fewer services, they cannot invest as much money into security, and they have to grow–which often means they need to draw more profit via fees and such.
Is There A Catch To High-Yield Checking Accounts?
If you are banking with a legitimate and upstanding company, then there shouldn’t be any catches, but there may be downsides or limits. Some companies have the audacity to charge fees for their interest-paying checking accounts, and many will hide or obscure those fees by demanding them for people who do not maintain a certain amount in their account, or for people who do not use their account very much.
Other banks and companies will only pay interest if you qualify. For example, you may qualify if you maintain a certain amount of money in your account, or if you use your debit card more than a certain number of times per month. Others may insist you have e-statements (which is not a bad thing), and most will have a balance cap that limits how much interest you may earn from your money. For example, if there is a $10,000 balance cap, then you do not earn interest on any cash over $10,000.
Who Isn’t A Good Match For High-Yield Checking?
If the bank or company charges fees for not maintaining a certain balance in your checking account, then a high-yield checking account is not suitable for people who live paycheck to paycheck or for people who invest their money in other accounts.
Even if you do live paycheck-to-paycheck, and there are no fees or minimum balance requirements, there is still a chance that a high-yield checking account isn’t right for you. After all, if you are earning little-to-no interest for the money you have/place in your account, then what is the point? Instead, you could have a checking account with a larger bank that offers more services. In addition, the other bank may be more willing to lend to you if you build a good banking history with them.
If you have credit card debt where your balance is not cleared every month, then a high-yield checking account is probably a waste of your time. For example, if you earn $1500 per month and you spend $1500 per month, then instead of keeping your money in your checking account, you could pile it all onto your maxed credit card and spend that money while (maybe) saving yourself a little debt interest.
The Argument Against That I Do Not Agree With
This article is slathered with my opinion and here is another–there are some articles that say, “What is the point if you only earn a few bucks or a few hundred per year?” In my opinion, if your money is able to earn a dollar in interest, then it is worth having a high-yield checking account.
That opinion is based on the assumption that the money in your checking account has to stay in your checking account until it is used. It is based on the fact that you cannot invest that money elsewhere because you may need it to hand at any point. If that is the case, then while the money is unused it is depreciating, which is why I think that even if you only earn a dollar, it is still better than earning nothing.
Who May Benefit From High-Yield Checking?
The first, albeit least obvious person, is a retiree who invests a portion of his or her cash into a CD. A CD a savings account that has far less risk than most other savings account, they are most commonly found in the USA, and the money is insured. Your savings CD may be insured by the NCAU (National Credit Union Administration) with credit unions and the FDIC (Federal Deposit Insurance Corporation) with banks. Savings CDs are popular because they have a specific fixed term and a fixed interest rate. It may be wise to hold your money in a high-yield checking account until you find a suitable/attractive CD rate. It also gives you time to add a little more to your pool of cash before you invest it.
People who wish to invest in general may benefit from an interest-paying checking account. For example, there has been a few times when I have monitored the share price of a company for a long time with the intention of investing when the price hits my personally forecasted low. Since the trough may appear at any time, it is not wise for me to invest my money elsewhere because I may not be able to get it out in time when my investing opportunity manifests itself. While I wait, the money in my high-yield checking account earns interest.
Who Else May Benefit From A High-Yield Checking Account?
If you have a high income, or you occasionally receive large amounts, you may carry a balance of thousands in your checking account. If that is the case, you may benefit from interest on your checking account. Even if you are not a high earner, you may benefit from interest on your balance if you consistently leave money in your checking account because you spend less than you earn each month.
In some rare occasions, it is possible to earn more from your interest-paying checking account than within other investments or accounts. For example, you may receive 1% APR every six months with your high-yield checking account, and only 0.5% in your flexible savings account. Also, if you only have a high balance for a limited time, you may receive more from a high-yield checking account that compounds quarterly or every six months.
A high-yield checking account may simply be convenient. Maybe you are not very interested in investing and wealth building. Maybe your Roth IRA and your 401K are well stocked and you decide to keep your money stored in your checking account. If that is the case, there is nothing wrong with earning a little interest on your balance since you are not going to invest the money elsewhere.
Conclusion – Earning A Little Money Is Better Than Earning None
If the minimum requirements for your high-yield checking account are not too strict or too difficult, and if they are not charging fees for your account, and if you bank with a reputable bank/company that is insured, then you should consider a high-yield checking account. Is it worth all the fuss of opening an interest-paying account if you will only earn a few dollars per year…yes. You don’t have to undergo open-heart surgery to open your account, there is very little fuss involved.
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Take note of the pros and cons listed in this article, and remember that you could be building a good banking history with a larger and more powerful bank instead of earning interest on your balance. Consider the points made in this article before deciding, but if it is a case of, “Ohhh, it is too much fuss for just a few dollars,” then I vote you do it because earning a few dollars is worth the tiny amount of fuss required to open and maintain the account.