Winners and losers from changes to Consumers Credit Union Free Rewards Checking accounts (and why it matters)

I’ve been an enthusiastic fan of high-interest checking and savings accounts ever since you could earn 6% APY on your PayPal account balance back in the early 2000’s (unfortunately I was in college at the time and barely had two quarters to rub together at 6% APY). The boring reason is that the more work your risk-free assets are able to do, the less work your riskier investments have to do in order to meet your long-term financial needs.

That made me immediately concerned when I saw Doctor of Credit report some Consumers Credit Union Free Rewards Checking accountholders had received notification of changes to the conditions required to qualify for elevated interest rates. Now that I received my own notification, I want to dig into the details.

Background

As long as I’ve been a member, Consumers Credit Union has offered three interest rate tiers for qualifying Free Rewards Checking accountholders. While the exact interest rates have bounced around a little, the basic rules were:

• Tier C: 12 signature debit transactions per month and a direct deposit or ACH credit of $500 per month to your account, plus signing up for electronic statements.
• Tier B: Tier C requirements plus $500 spent on a Consumers Credit Union credit card.
• Tier A: Tier C requirements plus $1,000 spent on a Consumers Credit Union credit card.

The three key changes they’ve made, starting on October 1, 2018, are:

• the debit transactions no longer have to be signature-based, i.e. they can be PIN-based instead;
• the 12 transactions must total $100 or more per qualifying period (previously no minimum);
• and the increased interest rates are only available on deposits up to $10,000 for all three tiers (previously $15,000 for Tier B and $20,000 for Tier A).

Winners: high-interest, low-balance savers

If you were already triggering the Tier B or Tier A requirements each month, but had $10,000 or less in your Free Rewards Checking account, then congratulations! Your interest rate is being raised from 3.59% to 4.09% or from 4.59% to 5.09% APY. On a $10,000 balance, you just got a $50 annual raise.

And if you were stuck at Tier B, you just got another nudge to qualify for Tier A instead each month!

Losers: high-interest, high-balance savers

On the other hand, if you were holding $20,000 in your Free Rewards Checking account and meeting the Tier A requirements, your annual interest income is dropping from $918 to $529 (5.09% on the first $10,000 and 0.2% on the second $10,000).

Losers: low-cost automators

I’ve found that Consumers Credit Union has been pretty good about treating my microtransactions as signature purchases. For example, $0.50 Amazon balance refills and $1.00 Plastiq bill payments have all counted towards my 12-transaction requirement. On the other hand, I’ve had a misfire or two, like buying $0.50 in Kiva credit, which was processed as a PIN-less debit transaction and did not count towards my qualifying transactions.

The new puzzle for low-cost automators is how to get to 12 total transactions with those transactions totaling to at least $100. The first 11 transactions can still be automated using a service like Plastiq, especially if you have access to fee-free dollars (you earn $500 Fee-Free Dollars when you sign up and make $500 in payments, and $1,000 Fee-Free Dollars when someone signs up with your referral code), but if you’re making $100 per month in payments (eleven $1 payments and one $88.01 payment), then you’ll end up paying something like $0.99 in fees (or using $100 in Fee-Free Dollars). Not ideal!

The obvious solution for most folks will be to automate the first 11 transactions and then set up a monthly $89+ payment to a recurring biller like a cable or phone company. I don’t have any bills that high, so come October I plan to set up my 12th payment to my student loans until I run out of Fee-Free Dollars.

Why it matters

Folks with workplace 401(k) or 403(b) plans, IRA’s, HSA’s, mortgages and car loans find my interest in these high-interest opportunities a distraction. But I think there are two reasons everyone should care about maximizing the return on their FDIC-insured savings.

• First, most people have no investment or retirement savings at all. For many US workers, the balance on the prepaid debit card their paycheck is deposited to is the entirety of their “savings.” Simply moving from a high-fee prepaid debit card to a high-interest Free Rewards Checking account is the single most important thing most workers can do to maximize the value of their savings.
• Second, even folks who do have a comprehensive, well-rounded investment strategy should be aware that integrating a high-interest, FDIC-insured account into that strategy increases the investor’s ability to take risk in the other parts of their portfolio.

To illustrate a stylized version of the second point: if someone has $20,000 of investable assets and wants to achieve the exact return and volatility of a 50/50 investment of $10,000 in US equities and $10,000 in fixed income, they could invest $10,000 in VTI and $10,000 in BND, Vanguard’s total stock market and total bond market ETF’s.

However, substituting their $10,000 of fixed income exposure with a higher-interest FDIC-insured checking account allows them to either increase their equity exposure in order to expose more of their savings to riskier assets and try to achieve a higher overall return with the same volatility, or reduce their equity exposure in order to achieve the same overall return with fewer assets exposed to equity volatility.

Conclusion

If you consider volatility the cost you pay for investment returns, then you should try to reduce that cost just as hard as you try to reduce the costs you incur through expense ratios and trading commissions.

High-interest, FDIC-insured rewards checking accounts are one of the lowest-volatility, highest-interest fixed income investments available to most people, and most people would be better off substituting them in to the degree possible for their more expensive fixed-income investments.