The Shrinking Balance Caps of Reward Checking Accounts

The balance caps of reward checking accounts are falling. In addition to lower rates, I'm seeing more reward checking accounts with low balance caps. In the past most reward checking accounts had balance caps of $25K. That means that the top rate only applies to balances up to $25K. A lower second-tier rate applies to the portion of the balance over $25K.

Balance caps of $10K, $15K and $20K are becoming more popular. A credit union that has maintained a $25K cap since 2007, Consumers Credit Union, recently informed its members that the cap will be falling to $10K starting in November. I just reported yesterday that Mutual 1st Federal Credit Union in Nebraska reduced its cap from $25K to $15K. The top yield actually was increased from 4.00% to 4.15% APY. Those who only had $15K in the account would see the amount they earn annually on interest rise by $21. However, those who had $25K would see the amount they earn on interest fall by $330.

Some banks and credit unions have been nice in that they only reduced the cap for new customers. For example, Danversbank grandfathered existing customers when they reduced their cap from $100K to $25K. United Heritage Credit Union in Texas kept its $25K cap for members who had opened its original reward checking account. For new accounts, the cap is $10K.

Most new reward checking accounts that have recently been launched have caps under $25K. One example is the new reward checking account at Beacon Federal which has a $20K cap. I first reported on it in this September review. It's still paying 4.00% APY for balances up to $20K, and I just learned yesterday that it's available nationwide.

For those with large savings who use reward checking accounts in place of savings accounts, this change can be as costly as rate cuts. If you want to keep the same amount of money earning the high rates, you have to open more reward checking accounts. Many readers have reported that they already have multiple reward checking accounts. In my poll from last month, 11 out of 89 readers said they have 8 or more active reward checking accounts.

The Poll Question

That leads me to the poll question of the day: What's the lowest reward checking balance cap that you will tolerate?

One thing that could complicate your answer is the interest rate. A $10K cap is easier to tolerate if it's paying 5% rather than 3%. For the sake of this poll, assume that low-cap reward checking accounts don't offer significantly higher rates.

Balance Caps and Reward Checking Accounts

These balance caps might seem strange to those unfamiliar with reward checking accounts. With most traditional money market and checking accounts, a higher interest rate applies to larger balances. However, with reward checking, the banks depend on fees from debit cards to help offset the costs of paying the high interest. That's why all reward checking accounts require a certain number of debit card purchases per month. Larger checking account balances only increase the banks' interest cost without increasing the debit card revenue. Banks just need a balance cap large enough so they'll be able to attract new customers. Since the average person doesn't have much savings, a lower balance cap may be better than lower rates from a marketing point of view.

To learn more about reward checking accounts and how they can pay such high rates, please refer to my post, The Math Behind Reward Checking.

To find reward checking accounts in your state and that are available nationwide, please refer to the reward checking section of DepositAccounts.com.