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How Rate Tier Changes on Reward Checking Accounts Affect Interest Earned

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Reward checking accounts have been useful for many savers in the last few years. These accounts have been the only way for savers to earn interest rates above 2% without any risk and without any loss of liquidity. However, there’s no free lunch. Monthly activity requirements like debit card purchases are necessary to qualify for these high rates. There’s also another feature of these reward checking accounts that reduces their appeal. All have balance caps. The portion of the balance over the cap earn a much smaller interest rate. Small caps can make reward checking accounts not worth the effort.

Another problem with balance caps is that it can make it difficult to track reward checking accounts. Savers have typically only worried about the interest rate. With reward checking accounts, savers need to keep an eye on both the APY and the balance cap of their accounts.

One recent example is the rate tier changes that occurred at Security Bank in Oklahoma. Below shows how the top rate remained the same, but new rate tiers result in lower amount of interest for savers:

Original rate tiers:

  • 2.05% APY for up to $25K
  • 0.30% interest rate for portion of balance over $25K

Total interest for $25K balance in one year = $512.50

New rate tiers:

  • 2.05% APY for up to $15K
  • 1.00% interest rate for portion of balance over $10K and under $25K
  • 0.30% interest rate for portion of balance over $25K

Total interest for $25K balance in one year = $407.50

If a saver only keeps $15K in their account, there will be no change in the total interest earned. However, if the saver keeps $25K, there will be a significant reduction in the total interest earned. In this case, $10K of the $25K will only earn 1% rather than 2.05%. That will result in $105 less of interest over one year.

Another confusing thing about these rate tiers is that it complicates the APY calculations. Annual percentage yield (APY) not only takes into consideration compounding, but also different interest rates for different ranges of balances. Below is how Security Bank lists the APYs for the different rate tiers:

  • Balances up to and including $15,000 earn Bonus Rate of 2.031%. 2.05% APY
  • Balances over $15,000.00 to $25,000.00 earn rate of 1.00%. 2.05%-1.63% APY range
  • Balances over $25,000 earn rate of 0.30%. 1.63%-0.30% APY range

Note the range of APYs for the top two tiers. For the middle tier, the 2.05% APY is for a $15K balance. The 1.63% APY is for a $25K balance. Below shows how this is calculated:

  • First $15K of the balance earns 2.05% APY. That results in $307.50 of interest over a year.
  • The portion of the balance from $15K to $25K earns 1.00% interest rate. That results in $100 of interest over a year.
  • The $25K balance earns the sum of the above which equals $407.50. Dividing that by $25,000 results in 1.63%.

We have more information on APY in the blog post Understanding Interest Rate and APY. To see all the details of how to calculate APY with these types of tiers, please refer to the "Tiering Method A" section of this FDIC consumer protection page.

How We List APYs in Our Rate Tables

As you can see above, this makes APY very confusing for reward checking accounts. To avoid this confusion, we decided not to list APYs like this in our rate tables. Instead we just list a version of APY that corresponds to the interest rate for the rate tier that matches the selected investment amount. For the Security Bank example, if you select an investment amount of $35K, Security Bank’s reward checking account will be listed with a 0.30% APY. We do include an asterisk to indicate that the APY shown is based on the deposit amount selected. If you click on the plus sign to expand the row, all of the rate tiers will be displayed.

If you want to compare reward checking accounts for a specific balance, you can do this by sorting the table based on "1 year estimated earnings". To sort the table based on this, click on the "1 year estimated earnings" column title. This allows you to see what account will pay you the most interest for a specific balance.

To find the best reward checking accounts in the nation or in your state, please refer to our reward checking table. To learn more about reward checking, please refer to this reward checking overview.


  Tags: checking account

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Comments
Comment #1 by Anonymous posted on
Anonymous
CCU recently changed their rewards APY for their checking account, but the only reason it was worth even looking into the deal is that they reinstated the 10K tier that had been lowered to 5K over a year ago.  I think they realized that most saw that the reward program was unattractive at such a low limit on the highest interest rate, and so they increased the tier limit to bring back participation .All the levels above the 3.09APY rate are just a marketing scheme to get members to sign up for credit cards.

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Comment #2 by Ken Tumin posted on
Ken Tumin
Thanks for the info on Consumers Credit Union. You're right that the old $5K tier made the account very unattractive. I have more details in this blog post.

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