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In the past, we’ve discussed the best online high-yield savings account, covered the basics of certificates of deposit, and even explored the beauty of Roth IRAs. But we’ve never talked about checking accounts.

Many people believe checking accounts are the dinosaurs of the banking world. They’re not extinct yet. In the past few weeks, I’ve received two questions about them:

  1. “Where can I get the best rate on a checking account?”
  2. “How much should I keep in a checking account?”

Under certain circumstances a checking account can offer a better return than a savings account! In fact, there are a couple of ways to do it.

Online Checking Accounts
Though they’re not as common as online savings accounts, I was able to find a few high-yield online checking accounts.

ING Direct, for example, offers a high-yield checking account that can, in some cases, beat its high-yield savings account! Currently, the Orange Savings Account yields 2.75% per year. With enough money in the bank, the Electric Orange checking account is a better deal. Take a look:

  • If your balance is $0-$49,9999.99, you earn a 1.00% APY
  • If your balance is $50,000-$99,999.99, you earn 2.90% APY
  • If your balance is over $100,000, you earn 3.25% APY

This account comes with free Bill Pay and free ATM access. However, it is a paperless checking account. If you need to send a paper check, you can do so for free via the web interface. This account isn’t the one to use if you write checks to the babysitter or the cleaning lady, but it’s great if your finances are mostly online.

If I had enough in the bank, I’d actually move it from savings to checking to score the better rate. That 3.25% yield is competitive with the best high-interest savings accounts.

E*Trade provides a “max-rate” checking account with 2.90% APY provided you meet certain conditions (such as a $5,000 balance). I have no first-hand experience with this account, however.

Rewards Checking Accounts
Believe it or not, there’s a way to earn even higher rates of return with a checking account. Many small community banks and credit unions around the United States offer a special “rewards” checking account, a product administered by a company called BancVue.

Different banks have different names for this product. Here in Portland, Advantis Credit Union calls it a Fusion Checking Account, and offers a 5.00% APY. Rivermark Community Credit Union simply calls it Rewards Checking, and offers 4.01% APY. Other banks around the country are currently offering up to 6.01% APY.

Obviously, these rates are fantastic. There aren’t many places you can earn a guaranteed 6% return on your money right now. Unfortunately, there are a few catches. These rewards checking accounts usually come with some combination of the following limitations:

  • You must receive your monthly statement electronically — not via snail mail.
  • You must log into your account at least once per month.
  • You must make a certain number (generally around 12) debit card purchases. (ATM withdrawals do not count toward this number.)
  • You must make at least one electronic transaction each month. These include automatic payments to your utilities, for example, or a direct deposit.
  • The rate only applies to the first $30,000 (or so) in your account. (The cap at some banks is $10,000; at others, it’s $100,000.) The portion in your account above the cap only earns a tiny return.

If you use your debit card often, a rewards checking account makes a lot of sense. If you’re clever (and have a lot of money), you could actually use both types of accounts I’ve described. Put your first $25,000 or so into the local credit union to earn five or six percent, and then put the rest into an online checking account at three percent. (On the other hand, if you have that much cash, you’re probably doing something far more clever with it than parking it in rewards checking accounts!)

You can read more about these accounts at My Money Blog. Better yet, here’s a huge list of rewards checking accounts by state. (Those listed with a red asterisk are available nationwide.)

How much should you keep in checking?
This brings us, at last, to the second question about checking accounts. Chris wrote to seek advice on how much to keep on hand:

What is a good rule of thumb for a minimal balance in one’s checking account? I already have a healthy emergency savings account, so my question is, how low should I go?  I carry no revolving debt, and I am currently paying off installment debt (student loans), so I could get a guaranteed return on any extra money I put towards debt taken from my no-interest brick-and-mortal checking account.

The answer to this question depends entirely on the rates of return for the savings and the checking accounts, and how the accounts are used.

Though I have an Electric Orange checking account at ING, I don’t actually use it for anything yet. I haven’t fit it into my financial workflow. Instead, I use a normal no-interest checking account at my local credit union. Every month, I transfer a fixed amount there to pay the expected bills. The rest of my money earns interest in savings.

If I were to get my act together, I could transfer some money to Advantis to test their rewards checking account. I’m hesitant to put my entire emergency fund there because I don’t know if I’ll meet the “12 transactions a month” clause to earn the 5% interest. But if I transfered a small amount there and tested it for a couple months, I’d know for certain.

Now I’d like to hear from you folks. What sort of checking account do you use? Does it earn interest? How much? Have you tried one of these rewards checking accounts? How did you like it? Have you tried an online savings account? Or have you given up checking account altogether?

Checkbook register photo by lemonjenny.