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Banking customers looking to get in on reward checking accounts that pay 5% interest rates can still get good deals, but you need to do your homework first.  Finding out what bank reward accounts are all about and then learning how to dig up the best deals is key.

Reward bank checking accounts are just another creative example of banking accounts brewed in the financial laboratories at smaller banks and credit unions. In a word, reward accounts offer a better rate of return than traditional bank accounts.

But there are caveats. Typically, reward accounts require customers to make a minimum amount of debit card purchases each month, maintain a minimum balance, and use direct deposit to get their pay checks straight into the customer’s bank account.

Like most bank accounts, reward checking programs are fully insured by the Federal Deposit Insurance Corporation (FDIC) while reward accounts at credit unions are insured by the National Credit Union Administration. Those requirements help explain how banks make money off of reward checking programs. For example, every time you use a bank debit card, the bank earns an interchange fee on each transaction. So, if your bank requires that you make 10 purchases per month on your debt card, those fees can add up for banks.

That’s why they call it a “reward” rate. If you stick to the script and meet all the bank’s requirements, then you get the higher reward rate. But, if you fall off the beam and miss a requirement, the bank can pull the plug on the high rate and replace it with an even lower rate -- in many cases, below 1%.

So how do you get the best interest rates on reward accounts? Start by thinking small. Local banks and credit unions are typically more aggressive about offering higher rates than bigger banks.  Also, know that you have to actually qualify for your reward checking account, typically by establishing a direct deposit program with the participating bank.

In addition, you generally have to agree to have your statements delivered online, with no hard copies mailed to your home. And, in many cases, you’ll have to agree that only a portion of your total bank deposit is eligible for the higher rate.

Customer service may also be an issue. If you scour for the best interest rates, you might find the best deals on your checking accounts are with out of state banks. That begs the question: can you expect great customer service for a rewards checking account in New Mexico if you live in New Hampshire?

Finally, do your homework on rates offered by banks.  Some use a “bait and switch” approach by offering 5% rates on reward accounts but then yank those higher rates after just a few months.  So stick with banks that have offered 5% rates for a long period time, up to a year or more.

Overall, bank reward checking accounts can be a valuable addition to your personal financial arsenal. To increase the chances of securing a good deal, follow the tips above and learn how high-rate checking accounts can offer one of life’s sweetest rewards.

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