Charles Schwab's New 4.25% Free Checking Account

Update 2/04/10: The yield has fallen to 0.60% APY. Refer to the bottom of the post for the rate history.

Charles Schwab introduced a free checking account today with a yield of 4.25% APY. It has no minimum balance requirements and no monthly fees. Other perks include free bill pay, free checks and ATM fee rebates. The account is under Charles Schwab Bank which is FDIC insured.

To open the checking account, you first have to open the Schwab One Brokerage Account followed by the linked Schwab Bank Investor Checking Account. The typical $1,000 minimum is waived for the brokerage account when you also open the Investor Checking account. Also, there is no fee to open and maintain the brokerage account. The accounts can be opened online, by phone or at a branch.

According to this San Francisco Chronicle article, Schwab branches won't accept deposits. You'll have to mail in checks, use direct deposit or transfer electonically. Their electronic funds transfer (ETF) system is called MoneyLink allows you to link to your external accounts and make online ACH transfers. MoneyLink has no fees and it allows you to link to multiple external accounts.

As this AP article mentions, the launch of this high yield checking account may be a counter-attack against the banks like Bank of America and Wells Fargo which have recently made inroads into the brokerage business. Last year, Bank of America introduced a program allowing 30 free trades a month for customers with at least $25k in bank deposits (see post), and Wells Fargo introduced a similar program in February (see post).

Since customers won't have the easy branch access with the Schwab Investor Checking Account, the online banks may have more to worry than the big brick-and-mortar banks. The 4.25% APY yield tops what ING Direct offers with its new Electric Orange Checking Account (unless you have over $50K), and with Schwab you have the advantages of paper checks and ATM fee rebates. Both HSBC and E-LOAN have mentioned plans for high yield checking. It'll be interesting to see what their rates will be.

With the mixing of bank accounts and brokerages, it's becoming confusing to understand what's covered under FDIC. Money held in this Investor Checking Account is under Charles Schwab Bank, N.A. which is FDIC insured (FDIC Certificate # 57450). However, money held in the brokerage account is under Charles Schwab & Co. which is a separate company from the bank. Brokerage products are not FDIC insured.

For other high yield checking account options, please refer to my best checking account summary post.

Rate History:
02/04/10: 0.60% APY
05/01/09: 0.75% APY
01/14/09: 1.00% APY
12/02/08: 1.50% APY
10/11/08: 2.20% APY
09/17/08: 3.00% APY
05/07/08: 2.01% APY
04/01/08: 2.26% APY
02/05/08: 3.01% APY
10/01/07: 4.00% APY
04/25/07: 4.25% APY