I’d had it with the next-to-0% interest Bank of America pays on checking account balances.

I bet you feel the same, because it isn’t just my bank, or just checking accounts for that matter.

It’s become next to impossible to get a decent interest rate.

Slim Interest-Rate Pickings Are a Real Problem

If you’re banking at most banks in the US, you’re likely getting somewhere between 0% and 0.25% interest on your checking account, with a national average of just 0.03%.

Savings account aren’t much better, with a national average interest rate of only 0.06%.

Willing to lock your money up for a while? Certificates of Deposit, or CDs, offer better rates, but not much. The best current CD rates are ridiculous too:

• 0.35% for 3 months
• 0.55% for 6 months
• 0.65% for a year
• 1% for 3 years
• 1.2% for 5 years

The best money market accounts currently offer up to 0.6% interest, unless you’re only interested in parking a limited amount of money there, in which case you might get as much as 2% for balances up to $2000, but as you add to that balance, the blended rate drops under 0.5%.

With inflation running at 7.2% for the past year as of this writing, money sitting in my Bank of America checking account, “earning” 0.01% interest, actually lost 7.19% of its purchasing power over the past 12 months!

Enter High-Interest Bank Accounts

It’s easy to find lists of high-interest bank accounts.

These are typically offered by small banks and credit unions, because they’re exempt from the so-called Durbin Amendment to the to the 2010 Dodd-Frank legislation. That amendment limited the fees most card issuers can charge merchants for debit card transactions.

Says Merchant Maverick:

“This legislation caps the interchange rate paid to non-exempt card issuers at 0.05% + $0.22. A non-exempt issuer is, with some exceptions, a card issuer with assets worth at least $10 billion. The cap applies to both in-person and eCommerce transactions. In other words, while your local credit union or hometown bank is still free to charge whatever they want in the way of debit fees, large, national banks (such as Bank of America and Wells Fargo) are significantly limited in how much they can charge for the same transaction.”

By charging high debit transaction fees, small institutions can make enough money to pay over 100x higher interest rates than the national average.

Currently, the highest-interest ones pay up to 4.25%.

A while back, I decided to go this route.

After looking through the various requirements to earn more, I picked Connexus Credit Union, which pays 1.75%/year on balances up to $25,000. Compared to any of the above options, it seemed like a clear winner.

But after a few months I can say that there are…

3 Reasons Why High-Interest Bank Accounts Aren’t Actually Worth It

1. You Have to Jump Through Hoops

High-interest accounts make you jump through hoops, and if you fail to meet their requirements you get 0% interest (or close to it) that month.

• Debit Transactions: As mentioned above, debit transactions are what fuel the bank’s ability to pay high interest rates. That’s why high-interest accounts typically require you to make 10–15 debit transactions per month. Connexus lets you make as few as one, as long as the total is at least $400/month. Whether one or 15 transactions, you need to move the same amount of money back into the account if you want to maintain the balance on which you get paid interest.
• Maximum Balance: The highest interest available may be limited to the first $2000-$3000 of your balance. If you want to park $25,000 in a high-interest account, you’ll find Connexus’s 1.75% is likely the highest current offer.
• Direct Deposit: Many such accounts require you to set up a monthly direct deposit. If you’re planning to use the account to receive a salary, that’s not a big problem. Since I’m self-employed, this was a non-starter, which made Connexus the better option for me.
• ACH Transfers: Some accounts require you to make monthly ACH transfers into the account. Not that this is difficult, but it’s another thing to stay on top of.
• Bill Payments: Some accounts require you to pay at least one monthly bill. This too isn’t a major issue, but again you need to remember to transfer a similar amount back into the account to avoid losing out on some interest as the account balance decreases.
• Other Requirements: These may include logging into your online banking (sometimes multiple times a month), accepting electronic statements, maximum number of free checks written per month, minimum balance to avoid a maintenance fee, etc. Most of these are just a nuisance.

2. Interest Payments Are Taxable

Interest payments are taxable, so if your marginal tax rate (federal, state, and local) is 30%, your effective net interest drops (e.g.) from 1.75% to 1.225%.

3. Paying by Debit You Lose Credit Card Rewards

We try to pay for everything using a credit card that pays us a 2% reward on every purchase with no monthly limits (of course, we always pay off the statement balance in full, to avoid interest charges).

In the case of my Connexus checking, even if I manage to find each month something to pay exactly $400 using their debit card, we miss out on 2% of that $400, or $8. 

That doesn’t seem like much, but over a year this $96 drops the effective interest further, from 1.225% to 0.841%. Still good compared to BoA’s 0.01%, but nowhere near as enticing.

Better Options to Earn High Interest Without High Risk

So, are we stuck with no way to even keep up with inflation without the risk of a high-flying stock market?

In a word, no.

At the moment, the best option I’m aware of are so-called Series I Savings Bonds that you can buy directly from the US Treasury. 

As of this writing, they pay 7.12% annual interest(!).

Another option are Treasury Inflation-Protected Securities, or TIPS. These recently paid 0.125%, but tacked on top of the inflation protection, that’s competitive with the Series I bonds. You can see a comparison table between these two options here.

The main points are:

• Purchase limits: Series I are limited to $10,000 per year per Social Security number, while non-competitive buying of TIPS (i.e., you accept the market interest rate) are allowed up to $5 million
• Purchase increments: Series I $25, TIPS $100
• Life span: Series I 30 years, TIPS can be 5, 10, or 30 years
• Selling before maturity: Series I are redeemable anytime after at least 12 months, but you lose 3 months’ worth of interest if you sell before 5 years go by; TIPS can be sold on the secondary market at any time

Note that bonds may lose value if interest rates increase, and TIPS will lose value if inflation turns negative, becoming deflation. 

These risks don’t apply to bank account balances (though you’re guaranteed to lose purchasing power there as long as inflation is higher than the after-tax interest rate you’re paid).

Additionally, at least the Series I bonds have to be locked for at least a year, and if you want to avoid losing 3 months’ worth of interest, you need to consider them locked for 5 years.

The Bottom Line

Getting an extra $200 or so a year in net after-tax income is nice. However, is it worth the effort of jumping through all those hoops?

For me, the answer is no.

It was a worthwhile experiment, but after 5 months I’ve concluded the time, effort, and attention I spend to earn that interest are simply not worth it.

Given how inflation is running nearly 9x higher than what I end up with from my Connexus account, I’m seriously considering buying Series I bonds instead.

Disclaimer

This article is intended for informational purposes only, and should not be considered financial, business, or legal advice. You should consult a relevant professional before making any major decisions.