Spending

You can earn up to 5% cash back with a rewards checking account. Here's how

If you have the right habits, high-yield or cashback checking could be perfect for you.

Twenty/20

Earning rewards for spending is typically associated with credit cards. And whether you're after airline miles, hotel points, or cashback rewards, there's probably a credit card that offers what you're looking for.

But credit cards aren't for everyone. If you haven't built up much of a credit history yet or if you like the security of not being able to spend money you don't have, you may prefer to do your shopping on your debit card. Still, that doesn't mean you can't get rewarded, too. In fact, you may be the perfect candidate for a rewards checking account — one that pays interest on your balance or pays cash back on purchases as long as you meet certain requirements.

Depending on your financial circumstances and the type of account you opt for, you can earn up to 5% on your cash. "These are particularly attractive given the current interest-rate environment when other safe-haven investments are yielding near zero," says Greg McBride, chief financial analyst at Bankrate.

How to qualify for a rewards checking account

To qualify for an interest rate or cash back, you'll typically have to meet a few requirements. "The primary one is purchases on your debit card," says Ken Tumin, founder of DepositAccounts.com. "Typically you'll have to make around 10 per month."

Other common requirements include setting up direct deposit to your checking account, enrolling in online bill pay, and opting to receive electronic bank statements, he says.

Sound like money habits you already have? Then signing up for one of these accounts is a no-brainer, says McBride. "If you're already doing this stuff, then one of these accounts is going to fit like a glove," he says. "If you're not, training yourself to use one of these cards the right way is easier said than done."

VIDEO2:4402:44
How to successfully use a cash-back credit card

Video by Mariam Abdallah

If you currently do most of your spending on your credit card, it may be tricky for you to hit the debit card requirements every month, which can be doubly painful, McBride says. "If you're only hitting the requirements half the time, you're only earning yield half the time," he says, meaning that you're missing out on whatever extra rewards you could have earned from your credit card that month.

You're also missing out on the more robust fraud protections and payment flexibility that credit cards provide, he adds.  

Choosing an account? Do the math

If a rewards checking account sounds right for you, you'll have two flavors to choose from: accounts that provide cash back on some or all of your spending, and ones that pay an interest rate on your balance. Both operate under a similar principal: The higher percentage the bank pays you, the smaller portion of your account or spending applies to your rewards.

Cash back deals range from 1% to 5%, says Tumin, with higher-paying accounts typically capping payouts after the user spends a certain amount. "There's a community bank in Missouri that pays 5% cash back on your first $200 in purchases monthly," he says, citing an extreme example. "So you can earn up to $10 a month."

The interest rate you can earn from a high-yielding checking account will depend on your account balance. Accounts that pay an interest rate of 2% will typically come with balance limits of about $25,000, McBride says. "Accounts paying 3% or 4% will have caps of $15,000 or even $10,000," he says. "For younger consumers who don't have a massive stash of cash, it's pure upside."

For younger consumers who don't have a massive stash of cash, it's pure upside.
Greg McBride
Chief financial analyst, Bankrate

Determining which kind of account is right for you will require shopping around and some back-of-the-envelope math. Pay attention to how much money you typically hold in your checking account and opt for an account that will maximize your cash payout. "If you're putting $20,000 into an account, the best account may not be the highest yielding one," says McBride. "It's likely the one that pays a yield on your entire balance."

Head to DepositAccounts to shop for accounts available in your area, many of which will be offered by community banks and credit unions (which may have requirements for membership) or online banks. Look for accounts with no monthly fees — such as those levied against accounts that fall under a certain balance requirement — and with free access to large ATM networks, advises McBride, who adds that the bulk of accounts fit this description.

Once you have an account, keep it funded, he says. "Because this is likely your highest-yielding cash account, be diligent about adding to the balance or replacing what you take out," he says. "Don't be continuously drawing the account down. You want to maximize your yield."

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