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POSTED ON BY Ken Tumin
With some reward checking accounts paying 5%, it may seem like there's no reason to put any money into CDs which have rates much lower than 5%. There are still many nationwide reward checking accounts that pay around 4% APY. If you want a similar rate on a CD, you'll have to search hard and you'll have to settle for terms of at least 5 years.
For those with large balances, reward checking is problematic since most accounts cap the balance that qualifies for the top rate. However, even if you don't have a large balance, there is one issue to consider. There's no guarantee that reward checking rates will hold up. I hope they do, but as we've seen this year, rates have fallen.
Back in the second half of 2007 State Bank of Toledo was offering a nationwide reward checking account with a 6% APY with no balance cap. During that time, Pentagon Federal Credit Union came out with 6% long-term CDs. Some asked why lock your money into a CD when you could get the same rate in a liquid account. Two and a half years later, State Bank of Toledo's reward checking rate is down to 2.51% APY for balances up to $70K.
No one knows how rates will change in the future. Using CD ladders is a way to hedge your bets for both future high and low rates. So I'm not giving up on long-term CDs even in this current interest rate environment.
One other interesting note about 2007 is that this was the year that FNBO Direct came out with their 6% savings account special that lasted from May through September of 2007. After that promo, the rate fell to 5.05% APY. Like other savings accounts, the rates have fallen, and it's now at 1.40% APY which is about average for today's online savings accounts. So State Bank of Toledo's reward checking account has done well as a liquid account alternative to online savings accounts.
To learn more about reward checking, please refer to this reward checking overview.
For those with large balances, reward checking is problematic since most accounts cap the balance that qualifies for the top rate. However, even if you don't have a large balance, there is one issue to consider. There's no guarantee that reward checking rates will hold up. I hope they do, but as we've seen this year, rates have fallen.
Back in the second half of 2007 State Bank of Toledo was offering a nationwide reward checking account with a 6% APY with no balance cap. During that time, Pentagon Federal Credit Union came out with 6% long-term CDs. Some asked why lock your money into a CD when you could get the same rate in a liquid account. Two and a half years later, State Bank of Toledo's reward checking rate is down to 2.51% APY for balances up to $70K.
No one knows how rates will change in the future. Using CD ladders is a way to hedge your bets for both future high and low rates. So I'm not giving up on long-term CDs even in this current interest rate environment.
One other interesting note about 2007 is that this was the year that FNBO Direct came out with their 6% savings account special that lasted from May through September of 2007. After that promo, the rate fell to 5.05% APY. Like other savings accounts, the rates have fallen, and it's now at 1.40% APY which is about average for today's online savings accounts. So State Bank of Toledo's reward checking account has done well as a liquid account alternative to online savings accounts.
To learn more about reward checking, please refer to this reward checking overview.
Thanks for your thorough response, Ken!
Yes, the RCA rate is time-varying as well as bank-varying. To keep up with the top rate, one is forced to do rate hopping (my rule is hop only if the rate gain is 1% or more).
The amount is another issue for RCA. I have two grandfathered $100K RCAs with 4% APY. Still, the typical $25,000 per account is too small for my needs.
For the near-term, I have to make at least 4% APY for the "borrowed" money to be worthwhile (a 2.24% HELOC and several 0% credit card offer). So I am staying with RCAs.
When it is difficult, if not impossible to get the 4% APY for RCAs, I shall return the money or simply pay toward the 4.75% first mortgage.
Thnaks again for your thoughtful reply.
Happy Holidays to you and your family, Ken!
It's really not that difficult to properly use an RCA, and the vast majority of those who fail to receive the prime interest any given month is simply because of the customer's stupidity or laziness.
Even if I could find four RCAs here in California I'd qualify for at or around 3%, I doubt I could meet (b) and (c).
If I could find one RCA with a $100K cap like the other poster, that might work, but I don't recall any available to me here in Northern California. If I'm wrong on that, please let me know, since I'm open to the RCA concept if it's simple and practical.
Bozo
Direct deposit requirement usually can be met simply by ACH from other banks or utility billpay from the utility company end.
Ten debit transactions per account can be $1 - $2; and $5 is more than sufficient fro nay banks. It can be met with online payment (be sure to use debit card instead of bank account #/routing number.
Good luck.
All of the RCA's I've ever had, and I've had quite a few, have accepted ACH deposits/transfers from external accounts for meeting that requirement (even though the RCA banks seem to often use the term "direct deposit and/or direct debit."
I've yet to have a RCA of mine that required an actual direct deposit of a paycheck or pension check or something like that.
Most of those I have have the 10 debit card uses per month plus usually one ACH in or out, along with accepting electronic statements, which I prefer anyway.
I used to withdraw cash from the ATMs and use that to pay for my everyday expenses...groceries, gas, food out, etc etc... Now I rarely withdraw cash, and just use my RCA cards for all those mostly small routine expenses.
For most people, doing those kind of things via RCA is going to probably meet the requirements for at least two RCAs per month.
And on one more more, it's not either/or with RCAs and CDs....
For me, I keep the long-term cash I don't expect to need or use in 5-8 year CDs in laddered fashion... Hopefully by the time they begin to mature in a few years, rates will have rebounded some.
But I also keep a fair size amount of ready cash available, since I'm thinking about buying a condo sometime in the near future. For that money, I'm keeping it in 2 or 3 RCAs and have been earning 4-5% APY... Yet to miss qualifying in any month yet over the past two years.
Imagine driving around town with a debit card line of credit of $25K, $50K or even $100K, If you lose it or a rouge merchant keeps a copy of your card, he can sell it to the underground for profit and you could lose your shirt. Never mind the banks assurance that your loses will be minimal, it could take months of investigation and you will not have access to your money during that time. The account will be frozen and even FBI may be involved. They will assume you are the guilty party unless proven otherwise.
That is the biggest turn off for me.
I also have reservation to carry a debit card with all those money attached to it. It is scary if you lose it or a double swipe at the restaurant. Disputing a charge is a nightmare and the bank will charge $25 to cancel $1 unauthorized charge.
I have a RCA but only for day to day activity with around $1000 in it.
If you make that many credit card transactions, you might as well make some money from the bank.
I think it's pretty rotten that banks convince people to cost the merchant more fees my using the credit option instead of debit or cash.
As time goes on, more and more POS credit/debit machines at stores ask you for your pin first and make it a little confusing to use your bank card as credit instead of debit.
The idea of using ACH transfers hadn't occurred to me. I guess the issue there would be how much per month I'd have to transfer, and how much I'd have to keep in reserve at Alliant to cover the transfers.
It does get a tad complicated, but you've given me an interesting homework assignment.
Bozo
On depositaccounts.com right now there are *15* RCAs with rates of 4% or higher. One (ViewPoint Bank) even allows up to $50K.
Good luck.
As far as a direct deposit goes, I meet the requirement with as little as a $5.00 ACH push in, so no need to worry about a big dollar direct deposit.
As far as the people that worry about getting cards stolen...why not only carry the one you are using? Why not only use it where you are the only person swiping the card? Don't use it at a restaurant where someone can copy it.
My debit cards (and most peoples) have fairly small daily spending limits...500-600 dollars. Nobody is going to be able to clean you out unless your alsleep for a month.
I'm beginning to think some of you guys purposely try to spread misinformation.
I carry 11 credit and debit cards in my wallet. One of my cards fell off while paying at a supermarket.
I never found out until I wanted to use my card 4 days later.
I retraced all my purchases and found it at the supermarket manager's office. They never called the bank nor ever tried to find me.
If someone else found it and used it for four days, I would have never known about it.
I don't believe your statement that people are spreading misinformation about the debit cards. It is a real concern of mine and I believe everyone else with sound mind should worry about such things.
Most of the people carry at least 3 debit or credit cards as per FTC survey done last year.
As for the misinformation claim goes,
GET REAL, you are spreading the misinformation, not the other way around.
Listen, just do no-pin transactions all the time. Keep all the RCA cards in a safe wallet at home.
When needed, carry a few, do the transactions, record it, and put it back to the wallet at home.
Come on, you folks dream up so many risky situations, which will happen one in a million cases.
Do due diligence, as you do with all your crdeit cards.
Safeguard your pin as your life.
Try it for one RCA... when you get the hang of it, try more.
I am flipping more than ten RCAs for 3 years without any issues at all.
Lose the card at supermarket or got your card stolen... come on, do due diligence and be careful. These things will not ahppent to you at all.
You can dream up a lot of risky situations for your CDs as well.
Bottom Line: If you do not feel comfortable, walk away. But do not put all these unnecessary warnings to the public. There are people who are willing to give it a try.
P.S., we do not get commission from RCA banks:-)
I think that he/she was talking about RCA debit cards, not the general credit cards.
Disputing an unauthorized charge cost $25 or more Bucks to remove.
Losing it may cost you interest for that month by not being able to finish the debit requirements.
If you don't report the debit card lost on time may cost you dearly.
Replacing debit card cost $15 or more.
If you can not prove fraudulent charges, you may never recover your money.
Debit cards are much riskier then credit cards, but rewords are much greater.
Common sense is needed to deal with debit cards.
Also, would like to add that if you are overdrawn using debit card, will cost you $29-30 for each purchase that is below or negative on your balance account connected to that debit card. There is no such risk with regular credit card.
To portect it, one should avoid using PIN-based transactions (no-pin usage has the same MC protection and has zero liability). One can reduce or close the daily limit. I have tried a few banks, they all claimed that is is a universal limit and reluctant to change for my case. Indeed, one has to guard the RCA debit cards extra-carefully. Beyond two-day notices, you may lose $500 for fraudulant debit usage.
Anothe RCA issue is the liability for fradulant transfers, you have to informt the bank within 60 days (from your statement). Beyond 60 days, you may lose all the money plus the over-draft. So frequent online check of RCAs is also absolutely essential.
Finally, RCA is so new that banks have their own rules to handle these cases. It may be up to the mercy of the banks if anything fraudulant happens to your RCA accounts. Not like BofA accounts or checking accounts of some typical banks, that you are rest assured if anything strange happens.
Nevertheless, I still think RCA is much more worhtwhile than CDs; rate-wise and liquid-wise. One jsut need to be very very careful with the associated debit card as well as account status.
From now on my purchases will only be conducted using gold, or chickens.
With Glenn Beck blaring in your bunker?