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I have a bank account with checking and savings bundled together; if I make enough purchases with my debit card, I earn a higher interest rate on the savings. Today I decided to look at other types of savings account my bank offers to see if I can get a better rate if I move, say, the money I'm saving for a new car into a higher yield account.

Much to my surprise, my normal savings offers .45% APY after I use my debit card 5 times, but their regular savings only at most .14% (if I have $500,000 or more in the account)! Even money market accounts only go up to .18%. Why are these dedicated savings accounts all worse than the basic one that came with my checking account?

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The key is that you need to use your debit card to earn the higher interest rate. The bank can offer a higher interest rate on accounts connected with a debit card because:

  1. They earn additional income through debit card fees charged towards account holders, among other things. They offer the higher interest rate specifically to encourage people to use their debit cards.

  2. By offering a joint checking/savings account that requires you to use your debit card, the bank is assuming that you'll keep more money in your account than you would in a standard checking-only account. Your higher balance translates into more money the bank can loan out or invest, which usually leads to higher profit for them.

  3. Businesses pay fees to the bank to accept debit cards. These fees represent another source of profit for the bank. The more you use your debit card, the more the bank earns in fees, so the bank encourages you to use your debit card more frequently through incentives like a higher interest rate or waiving fees on your account if you use your card enough. Plus, since it's likely that an individual who maintains a fairly high balance in an account linked to a debit card is going to spend more (simply because they can spend more), banks will sometimes waive fees on the consumer side for balances over a certain amount.

  • I'm not sure about the second paragraph; the .14% is the highest tier of a scale based on minimum balance, whereas the rules for avoiding fees in my checking/savings are complex but pretty much sum up to needing far less in the account than the higher tier savings accounts require (like, two decimal places less). – Yamikuronue Jul 9 '13 at 17:10
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    @Yamikuronue I clarified it to mean you would keep more money in your checking/savings account than you would in a checking-only account. Also, I imagine that once you have more than $500K in cash, you start looking for other places to put it besides a savings account, so the number of people that earn the higher interest rate because of a balance that high in a savings-only account is probably comparatively small. – John Bensin Jul 9 '13 at 17:19

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