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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Falling Balance Caps for Reward Checking Accounts

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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:

  1. Lower the interest rates
  2. Lower the balance cap to reduce the balances that qualify for the high rate
  3. 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:

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.

  Tags: checking account

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Comments
5 comments.
Comment #1 by 51hh posted on
51hh
I just moved away from a (4.01%, $10K) RCA.  $25K is still my lower limit.  I will take $20K (rarely), only at an APY of 3.5% or higher.

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Comment #2 by Anonymous posted on
Anonymous
KEN......Any new info on what the I-Bond rate will change to in May? Thx!!

1
Comment #3 by pearlbrown posted on
pearlbrown
Ken, you are absolutely right that perceptions of what is an acceptable rate and cap have changed over the last two or three years.  We have all had to adjust to new “normal” rates for RCAs, Money Market accounts, CDs, etc.  On the other hand, the good news is that – at least for the moment - although rates and caps are continuing to drop, in the universe of RCA accounts covered by DA 40% have a $25k cap, 20% a $20k cap and 20% a $15k cap.  Needless to say, rates vary widely within the caps, as does availability of the accounts.     

3%/$20k is my lower limit, although I will take $15k under some special circumstances.   I have no interest whatsoever in $10k caps.  

6
Comment #4 by irene1 (anonymous) posted on
irene1
If I could do the debit card transactions on my mobile phone and put in the pin, my problems would be solved to meet the monthly qualifications.  But, I can't.  So, for it to be worth it,  the interest rate would have to be $20,000 atleast, and at 3% at least, because, doing alot of debit transactions in a store, just isn't worth it, after awhile.. .

8
Comment #5 by Anonymous posted on
Anonymous
IMHO, the banks got suckered into the BankVue products and so-called solutions so much that the banks are lowering the cap and/or interest rates to increase their profit. They should have been able to do it by themselves, especially those that has online banking without BankVue. Ever since my bank lowered from $25k to $15k cap on a 1.6% rate, and anything over is 0.10%, I transferred all the money to the best online savings/money market account, and opened an online free checking account where ATM surcharged are reimbursed; all without using a silly debit card or minimum balance.

2