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Is High-Yield Checking Right for You?

Marcie Geffner

A high-yield checking account may sound attractive. Right now, whatever balance you have in your checking account is just sitting there, earning nothing or next to nothing. So why not switch?

Though high-yield checking, with its higher annual percentage yield, can be a good choice, it's not always the best choice. While the higher APY is a nice perk, you may have to jump through hoops to get it, you may be charged a monthly fee that could cancel out the benefits, and other options may earn higher returns.

"These accounts offer attractive interest rates," says Xavier Epps, founder and CEO of XNE Financial Advising, in Alexandria, Virginia. "However, they can require you to make monthly transactions in deposits, automatic bill pay, and debit card use."

[Read: Best Checking Accounts.]

High-Yield Checking Rates

The principal benefit of high-yield checking is the higher APY. At a traditional bank, the rates likely are less than 0.05%, though they may be higher at online-only banks. However, the higher APY of high-yield checking comes with a few caveats:

-- The rate isn't locked for any set period of time as it would be for a certificate of deposit. Instead, the rate can change, up or down, at any time with no notice.

-- The higher rate may be capped (e.g., 3% up to $10,000 and 1% for additional amounts).

-- The higher rate may be tiered (e.g., 3% up to $5,000, 2% for the next $3,000 and 1% for additional amounts).

-- The rate may be only slightly higher than that of a standard checking account.

-- The rate may be lower than the rate for high-yield savings, standard savings or money market savings.

"While earning a small return on the money in your checking account is better than earning no return, the average daily balance in the account over a month is likely to not be high enough for most people to provide a significant benefit," says Drew Feutz, a financial planner with Market Street Wealth Management Advisors in Indianapolis.

The Federal Reserve reported in 2016 that the median checking account balance in the U.S. was $3,400. At that amount, if your high-yield checking account earned you 2% -- quite a good rate -- it would add up to just $68 for the year, or about $5.67 a month.

If your checking balance is big enough for a higher rate to be significant, you probably could earn more if you transferred your balance to a high-yield savings or money market account.

[Read: Best Savings Accounts.]

High-Yield Checking Requirements

Another point to consider is that high-yield checking usually involves multiple requirements that you must meet to receive the higher rate. You may also have to meet the same or other additional requirements to avoid being charged a monthly service fee, which could wipe out your rate bonus.

Examples of such requirements include:

-- Average daily minimum balance

-- Minimum number of direct deposits each month

-- Minimum number of debit card transactions each month

-- Electronic-only (i.e., no paper) statements

"There are so many good free checking and savings accounts that it would be difficult to justify a high-yield checking account that charges a fee," Feutz says.

If you normally use a debit card for living expenses, the debit card requirement may not seem like a hassle. Still, you probably could earn more with a cash back credit card. Unlimited 1% cash back is a common credit card reward, and many cards offer 2% or more for certain categories.

Planning to use your debit card more to capture a higher yield may backfire because it could encourage you to spend more than you'd planned for a relatively small benefit, Feutz says.

Before you choose a high-yield checking account, you should read the disclosures because there could be other restrictions. Examples include no paper checks, little reimbursement for out-of-network ATM use or limited options for customer support.

Epps says, "High-yield checking accounts tend to come from small regional banks or local credit unions that don't have many ATMs, which can add to the hassle of having these accounts."

[Read: Best CD Rates.]

Is High-Yield Rewards Checking Right for You?

The answer depends on how you intend to use your account.

If you normally keep a high balance and use your debit card often, high-yield checking could be a good choice. Otherwise, you may be better off with a standard checking account with no monthly fee, a high-yield savings account and a cash back rewards credit card that you use responsibly.



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