You may be familiar with a credit card rewards program, but what is a rewards checking account? Simply put, a rewards checking account is a type of checking account that allows the account owner to earn cash back on debit card purchases, or provides additional rewards and benefits above and beyond what a standard checking account would provide.
These types of checking accounts are becoming increasingly more popular as it’s difficult to resist earning a reward for money you were going to spend anyway. We’ll cover everything you need to know about rewards checking accounts, and how you can open one, below.
How Does a Reward Checking Account Work?
A reward checking account gives the account owner cash, or incentives, for their debit card purchases. Additionally, a reward checking account typically provides a stronger annual percentage yield when compared against a standard checking account.
What Is a Reward Checking Account Used for?
A reward checking account is used just like a standard checking account. The account owner can deposit money directly into the account, and they can spend that money as they please. However, unlike a standard checking account, a rewards checking account provides additional perks and benefits.
What Is Required to Open a Reward Checking Account?
Requirements can vary by financial institution and account type. Generally speaking, one can open a reward checking account if; they do 10+ debit card transactions per month, are enrolled in direct deposit, and have an account balance over ‘X’. The account balance minimum is typically higher than what is required for a regular checking account.
Do Reward Checking Accounts Charge Fees?
Fees also vary by financial institution and account type. For the most part reward checking accounts do charge fees. Some fees can be avoided depending on your account size and transaction history.
Where Can I Open a Reward Checking Account?
Opening a reward checking account can be done at your brick and mortar bank, credit union, or even an online bank.
Do You Get a Bonus by Opening a Reward Checking Account?
Some financial institutions do in fact provide a bonus or incentive for opening a reward checking account. It’s not uncommon for a bank to provide a bonus to its customers when their initial opening account balance exceeds a specific amount.
Best Features/Functions of Rewards Checking Accounts
These reward checking accounts come with many great features.
- Cash back: There’s nothing like getting money back for spending money on something you needed to buy anyway! Although the rewarded cash will never make you rich, it’s still a nice perk to have and can add up throughout the month or quarter.
- Higher Annual Percentage Yields: More often than not, a rewards checking account will provide the account owner with an annual percentage yield above and beyond what a standard checking account provides. The annual percentage yield, or APY, is the money a bank gives you for your money stored in one of their accounts. For example, if the bank is providing a 1% APY and you keep $10,000 in your rewards checking account, you’ll receive $100 in interest throughout the year.
- Additional Perks: In addition to earning cash back, some banks also provide additional perks or discounts. This could include discounts at specific retail locations or stores, or even airline miles.
Disadvantages of Rewards Checking Accounts
Although receiving rewards for money spent sounds great, there are a few disadvantages you’ll want to be fully aware of before setting up a rewards checking account.
- Many rewards checking accounts come with higher fees: On a high level, this makes sense. If a bank is willing to give you more, they often charge you for it! Some of these fees can be avoided depending on your account balance.
- The additional strain the requirements may put on your financials: If your bank has a high minimum balance requirement, you may float money just to hit that minimum to avoid paying a fee.
- Spending motivation: If you’re going to spend the money regardless, it never hurts to get some cash back or a reward. But if the cash back or reward is your motivation, or justification, to spend the money – that can present problems. Only spend what you are comfortable with and able to spend.
How To Open a Rewards Checking Account
Opening a rewards based checking account doesn’t need to be complicated. All you’ll have to do is:
Step 1: Shop Around
Before opening an account, be sure to review numerous options. These accounts are offered at large brick and mortar banks, credit unions, and even online banks. Each institution will have something unique about it. Be sure to factor in all important variables, not just the rewards, before you make your decision.
Step 2: Meet With the Team
Once you’ve identified where you’d like to open this account, meet with their team to discuss what it takes to open an account. You will likely have to fill out the application paperwork and provide identification.
Step 3: Deposit Money
If you qualify for the account and you’re approved, you’re almost at the finish line! Once approved the bank will ask you to make the minimum deposit to officially get this account opened.
Step 4: It’s Open
Congratulations, the account is opened! A debit card may be issued to you right there on the spot, or you’ll have to wait a few days for the card to arrive in the mail. Once you have the card in hand, you’ll be ready to start spending money.
Be sure to update your direct deposit form accordingly to have your paycheck automatically deposited into your new account.
Regular vs Rewards Checking Accounts
Regular checking accounts are very similar to a rewards checking account. The biggest differences are regular checking accounts:
- Do not provide a reward or cashback incentive for spending money
- The annual percentage yield is typically lower
- The fees for having the account are lower
In terms of overall functions, both accounts provide access to a debit card, a checkbook, and direct deposits.
Rewards Are Just One Component
Having a rewards checking account that provides incentives or cash back for all your purchases is certainly a great benefit! Free money is always welcomed. With that said, if you’re attracted to a rewards checking account for the additional cash flow it can provide, you should consider working with a professional financial advisor.
Financial advisors can help you invest your money and create passive income streams. The world of investing is limitless and can seem overwhelming. There are so many options to choose from, some with high risk and some with low risk. Financial advisors will take the time to understand your goals and prepare a customized financial plan that will help you reach your targets.