Thursday, June 30, 2011

Debit Card rule change might hurt Reward Checking

Ken, the guru of , wrote this article that there is a Fed Reserve rule change, that will lower the fees from a debit card transaction, that banks charge retailers significantly.

This could HELP consumers IF the retailers passed along part of any savings, which is probably doubtful (retailers will just take the savings as profit).

This could HURT consumers in that these fees the bank gets from debit cards are used to subsidize Rewards Checking accounts.

What will be the impact on options on how a consumer manages their Emergency / short term cash funds?

For liquid deposit account , my guess is that Rewards Checking, if still offered, will still offer the best rate. Currently, Rewards Checking is widely available at 3-4% at many small local banks & credit unions. This is superior to bank alternatives, including the deposit accounts of type savings, money market. It's also superior to a time deposit account such as a certificate of deposit (CD), even despite the inconvenience of a time deposit locking up your money for a period of time. I will keep my eye on depositaccounts, hopefully remembering to check in Dec 2011 & Jun 2012 to verify that Rewards Checking is still superior, aka the "least bad option" in this era of negative real interest rates for short term savers.

The other decent option imho is I Bond, a type of Savings Bonds from the US Treasury. I've yet to buy an I Bond, but am interested. Here is my limited understanding of I Bonds. Each person can purchase up to $10K per year, $5K in paper & $5K electronic. The I Bond updates its interest every 6 months, in relation to the US Gov's CPI inflation index. An I Bond is like a time deposit in that you must hold it for 11 months. After that can be sold, with a penalty of giving up the most recent 3 months of interest. After 5 years there is no 3 month penalty, & it can be held for up to 30 years. The interest income might be partially exempt from taxation (need to learn more about this aspect).

A key notion is that one can set up their FUTURE emergency fund through I Bonds. For example, if one bought $10K in I-Bonds by the end of May-2011, she would have $10K + interest available for sale quickly. It wouldn't be as liquid as a deposit account, but it shouldn't take much times (2 weeks?) to sell the bonds & receive the cash that you could put in a deposit account.

It's possible that best after-tax Rewards Checking rate available in your state declines to the point that it's lower than the comparable I Bond rate. In this case those who purchased I Bonds in prior years would benefit. It's possible that it could be beneficial to buy some I Bonds & hence "diversify" your Emergency cash between Rewards Checking & I Bonds.