'High-yield' checking paying only 1.64% interest

(MoneyWatch) Looking for a high-yield checking account, one that actually pays more interest than the rate of inflation? It exists, but it comes with a number of limitations.

The current average interest rate on a high-yield checking account is nearly 33 times that of an ordinary interest-bearing checking account, according to a report from Bankrate.com. The national average for the latter is only 0.05 percent, whereas high-yield accounts pay a rate of 1.64 percent.

According to the Bureau of Labor Statistics, with U.S. inflation at 1.1 percent, you actually lose money with a normal interest-bearing account, as your cost is 1.05 percent of the amount deposited. The nominal return of a high-yield account may be low, at only 0.54 percent, but at least it covers cost.

A high-yield checking account is also a good deal when compared to other options offered by banks. You have ready access to your money, which is not the case with CDs, and the return is nearly equal. According to Bankrate, the highest-yield CD is 1.75 percent, but to get that rate you cannot touch your money for five years. A savings account isn't a particularly good alternative just now. Bankrate says that the highest listed rate for a money market savings account is 1.01 percent, and the national average is far less, at 0.11 percent.

High-yield checking accounts do have limitations. They provide only electronic statements and and the account holder must make a minimum of 10 debit card transactions a month, which presents a problem for consumers who prefer to charge their purchases with rewards credit cards. Some high-yield accounts require consumers to use direct deposit and automated bill paying. Failure to abide by these restrictions will cause the average APY to drop to 0.07 percent.

There is also a maximum on deposits into a high-yield checking accounts. The rate of return applies only up to a certain limit, known as the balance cap. The average cap is $17,102 (down from $19,118 last year and $25,482 in 2010), but the cap for high-yield accounts is usually lower. According to Bankrate, none of the 14 highest-yielding accounts available nationwide have a balance cap above $15,000.

In real terms, that means someone who maintains the average deposit in a high-yield checking account paying the average interest rate will make about $280 annually, down from about $392 last year.

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.