If you get any interest at all on your bank accounts, the rate is probably pathetic. The average interest rate paid on savings is well under 1%, according to Bankrate.com, and yields on certificates of deposit aren't much higher.

But some people are making up to 5% at federally insured banks and credit unions. They've discovered "rewards checking" can supercharge returns on their cash.

Let's be clear right upfront: Rewards checking isn't for everyone. In fact, it's probably not a good fit for most people, because you have to jump through a few hoops, such as:

• Making 10 to 12 debit card transactions a month.


• Accepting electronic rather than paper statements.


• Setting up direct deposit or at least one monthly automatic payment.


• Logging on your account online.

But for the right kind of saver — one with a substantial amount of cash who's motivated, detail-oriented and comfortable online — rewards checking can be a boon.

A 5% rate on $25,000 can bring in $1,250 a year.

Are there any gotchas?

Blogger and author J.D. Roth of Get Rich Slowly said many of his readers are big fans of their rewards checking accounts.

"They're willing to do a little extra work every month to be sure they qualify for the rewards rate, because they know the payoff is worth it. But then, GRS readers love to micromanage their finances," said Roth, the author of "Your Money: The Missing Manual." "I tried to use one myself but found I couldn't keep up with the minimum number of transactions."

If you fail to meet the requirements in a given month, you don't get the higher rate but instead earn a default rate that's typically a fraction of 1%. Also, you may not be able to find a 5% rate or even 4%, because financial institutions may accept only local customers or those from a defined geographic area. Web sites such as CheckingFinder and MoneyRates can help you find an eligible account, and Bankrate.com just released its 2010 study of high-yield accounts.

There are other limits to the institutions' generosity. The advertised rate typically applies to the first $20,000 to $25,000 you deposit. At HCSB in Hart, Texas, for example, a 3.51% rate applies to the first $25,000 deposited while anything over that amount earns 1.51%.

And rates can change. Yields that averaged 5% to 6% a few years ago are now down to 2% to 3%, said Gabe Krajicek, the CEO of BancVue, an Austin, Texas, consulting company that markets rewards-checking programs to banks and credit unions.

Why rewards checking pays,
for banks and you

If you don't keep a lot of money in your account, the effort may not be worth the reward. A 5% rate on a balance of $1,000 would earn you less than $5 a month, and all those required transactions can boost your risk of overdrafts. The resulting fees could wipe out any interest and then some.

It's when you can keep $5,000 or $10,000 or more on deposit that rewards checking really starts to shine. Also, the accounts typically don't have minimum balance requirements or monthly fees, and many reimburse ATM fees up to a certain dollar amount, typically $20 to $25.

Rewards checking has been growing in popularity as community banks and credit unions look for ways to win customers back from big banks.

"In 1994, 70% of deposits were with community banks, and 30% were with banks with over $10 billion" in assets, Krajicek said. "Today it's the exact opposite. It's flip-flopped to where 70% of deposits are at the big banks."

You may suspect that financial institutions offer these programs hoping their customers will fail to meet the requirements and thus not get paid the top interest rates. You'd be wrong, said Krajicek, who says 75% to 80% of customers using BancVue-designed programs get the proffered rates each month. The success rate varies by financial institution, he said, but "it is extremely rare that you see more people fail than qualify."

Despite the high rates paid out, rewards accounts are more profitable than regular "free" checking accounts, Krajicek said, because account holders tend to:

• Keep bigger balances.


• Generate more merchant interchange fees from using their debit cards.


• Impose fewer costs on the bank because they handle their money online, rather than with a teller.


• Stay with a bank or credit union longer.

The financial institutions that sponsor rewards checking hope you'll use your debit card like a credit card — that you'll sign for transactions rather than using a personal identification number, or PIN. That's because the merchant fees associated with signature debit card transactions are much higher and equivalent to the fees banks earn with credit cards. You also get more consumer protections when you choose to sign rather than punch in a PIN.

Some rewards accounts require you make a certain number of signature transactions, but others don't. It's something to check before you sign up. Also remember that using your debit card for gas purchases, hotels and rental cars involves more risk, because a big chunk of your checking account balance may be blocked off by "holds" that increase the likelihood you'll overdraw the account.

To make sure as many people as possible get the advertised rate, BancVue sends out monthly e-mails to participating institutions' customers coaching them on how to qualify. The e-mail reminds customers of the number of debit card transactions they need to make each month to get the top rates, Krajicek said, and encourages them to try again next month if they fell short.

The e-mails prevent the inadvertent bait-and-switch that happens when people sign up for a bank account, such as free checking, and then forget what they need to do to avoid fees.

"Six months after people open an account, they don't have a clue about what they need to do" to maintain it, Krajicek said. "It helps to send them reminders."

Still, Roth noted — and Krajicek acknowledged — that rewards programs are marketed to banks and credit unions as a more profitable alternative to traditional, no-interest, free checking accounts.

"As much as I love credit unions and small banks, I'm always wary of anything that somebody else considers a profit center," Roth said. "If it's a profit center for them, I worry that it's not a good deal for consumers."

But credit unions and banks that use the programs insist that they're a win-win.

Rewards checking is helping Aspire Federal Credit Union, based in Clark, N.J., retain existing customers and attract new ones, said Laura Harding, the credit union's vice president of marketing and business development. Aspire launched its program in January, and so far most participating members are earning its 3.51% advertised rate.

Not all those customers will be profitable, but Harding believes enough will decide to use Aspire as their main financial institution to make the program worthwhile.

"By using us for their everyday banking, we're making money off the transactions," Harding said. "And they're more likely to come to us when they're ready to get an auto loan or buy their first house."

Related Links:

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Debit card rewards: Are they as great as credit card rewards?

How loyalty programs work, and why we prefer rewards points