In the last month we have seen several banks and credit unions not only lower the rates of their reward checking accounts but also lower their balance caps. The balance cap is unique to reward checking accounts and is probably overlooked by the average Joe who’s not familiar with reward checking. However, savers know the balance cap is as important as the rate.
The vast majority of reward checking accounts only pay a top rate for balances up to a certain level. For example, some banks pay 2.00% APY for balances up to $25,000. The portion of the balance over $25,000 will typically earn a much lower rate like 0.25%.
One reason for the balance cap is that reward checking accounts are helped by the account holders making debit card purchases. Every reward checking account requires the account holder to make a certain number of debit card purchases each month. The bank receives a small percentage of each debit card purchase through interchange fees. I’ve heard this averages around 1% of the purchase price. So if you make $1,000 of debit card purchases, the bank receives around $10 from the interchange fees. This helps the bank pay the high interest rate.
The problem with debit card purchases is that they don’t always increase with larger balances. Someone with a $25,000 checking balance probably won’t be making 5x the amount of purchases than someone with a $5,000 balance. In summary, the value of debit card usage has diminishing value to the bank as the account balance increases.
When a bank finds that it’s paying out too much interest on its reward checking account, it has three ways to reduce the interest that it pays out:
- Lower the interest rates
- Lower the balance cap to reduce the balances that qualify for the high rate
- Increase the monthly requirements to reduce the number of customers who qualify for the high rate
As I mentioned above, lowering the balance cap is growing more common. Below are some recent examples:
- Halliburton Employees Credit Union - Cap falling from $25K to $20K effective 4/1/2013.
- First Commercial Bank (OK) - Cap falling from $25K to $15K effective 4/1/2013.
- Nicolet National Bank - Cap falling from $25K to $15K effective 4/1/2013.
- Heritage Credit Union - Cap fell from $25K to $20K.
- First National Bank of Broken Arrow - Cap fell from $15K to $10K.
Thanks to DA members who have been posting on these balance cap reductions in the reward checking forum.
The important question for savers is how low of a balance cap will you tolerate. If you have $100K of liquid savings, I’m sure the $10K balance cap doesn't look appealing. Unfortunately, I’m seeing more reward checking accounts with even lower balance caps. One reward checking account that used to be popular is the Consumers Credit Union Rewards Checking Account. Last year the balance cap fell from $10K to $5K. It still pays a competitive rate of 3.09% APY, but the low balance cap is a major downside. Some of the new reward checking accounts that are being launched by credit unions only have a $5K balance cap. These include the Kasasa Cash accounts from Altier Credit Union and from Coastline Federal Credit Union.
Poll: What’s the Lowest Balance Cap That You Can Tolerate?
I thought a new poll that asks this question would be interesting. I’ve asked similar ones in the past. Do you tolerate lower caps now since rates and caps have continued to fall? It seems like a $15K cap is more tolerable now than two years ago.
Reward Checking Overview
If you’re not familiar with reward checking accounts, this reward checking overview should be useful. To find reward checking accounts in your state and that are available nationwide, please refer to the reward checking table.