How to earn up to 5% interest on a Minnesota checking account

Several Minnesota credit unions and small banks offer some of the most competitive interest rates on high-yield checking accounts, some much more than at other financial institutions.

Rate chasers know about the yields, but others may be unaware that these financial institutions in or around the Twin Cities area offer 2% to 5% interest on these accounts. Larger banks are paying next to nothing.

"We want to give people $1,000 a year in interest who are used to getting pennies," said Chris Petersen, chief financial officer at St. Paul Federal Credit Union.

St. Paul FCU's Simply Checking accounts pay 2.99% to 4.99% on balances up to $20,000, among the highest rates in the country.

Hiway Federal Credit Union, TruStone Financial and Center National Bank, among others, are paying 2% or more on the high-yield accounts. By searching sites such as Bestcashcow.com, Magnifymoney.com and Investopedia.com, consumers can find other options in other states.

The accounts include free checking, but the higher interest rates come with a price — not in extra fees but in a series of hurdles that account holders must clear each month.

The tallest one? They generally must make 10 to 20 debit card purchases each month to get 2% or more, depending on the institution.

Account holders generally also must sign up for e-statements and online or mobile banking. Some require direct deposits from an employer, a pension fund or Social Security and/or an ACH payment such as a utility bill.

A few such as Hiway and TruStone require a $1,000 or $2,000 minimum balance, but most have modest minimums.

The accounts usually include freebies such as the first box of checks, debit card and surcharge-free ATMs.

"These accounts fit like a glove for those who are already as a matter of routine doing things like using debit cards a lot and getting statements online," said Greg McBride, chief financial analyst at Bankrate.com. "Some people use a debit card 10 times a week, but it may not be as good if you were previously using a cash back or a rewards card."

Since the beginning of the year, U.S. consumer debit card use has increased, according to Kasasa, a wholesale financial-services company in Austin, Texas. St. Paul FCU's debit transactions hit an all-time high in March, Petersen said.

More than 1,200 banks and credit unions in the U.S. offer high-yield checking products. Many have offered them for a decade, said Ken Tumin, founder of DepositAccounts.com, a LendingTree division.

St Paul FCU has about 800 accounts getting 2.99% or more, but it limits membership to people who live, work, worship or attend school in St. Paul and most of Minneapolis.

Residents of the wealthier parts of Minneapolis are excluded, as are suburbs and greater Minnesota unless working, worshiping or attending school in the Twin Cities. Most credit unions have eliminated such barriers to membership.

How can small institutions afford to set higher interest rates than major banks?

First, they are taking advantage of lower interchange rates — the fees that banks or credit unions collect when a debit or credit card is used. Institutions with assets of more than $10 billion receive an average of 10 to 11 cents per swipe from the merchant. Smaller institutions receive 27 to 31 cents, according to Keith Brannan, chief marketing officer at Kasasa.

Institutions offering high-yield accounts also require e-statements to keep down costs. A paper statement mailed monthly costs them about $30 a year per customer, Brannan said.

The accounts aren't for everyone. "Some people don't have the spending patterns that will meet this requirement easily," said Simon Zhen, senior research analyst at MyBankTracker.com. "It may end up becoming a monthly chore."

Account holders who make just nine transactions instead of the required 10, for example, will receive closer to 0.1% instead of 2% that month, but no extra fees apply and the person still is eligible for 2% the next month. ATM withdrawals or deposits do not count as part of transaction requirement.

To get 5% interest at St. Paul FCU, the account holder must make 60 debit purchases per month averaging $5 each, plus make at least two direct deposits per month from a payroll or pension provider.

A couple with a joint account who each use a debit card stand the best chance of meeting those requirements, Petersen said.

Have people tried to game the system? Of course. Some customers put through multiple Amazon transactions for a penny each, Petersen said. Those were denied.

Most institutions have not set minimum purchases yet.

Consumers should also take note of balance caps.

"The high interest rate only applies to balances up to a certain amount [such as $10,000 to $25,000]," said DepositAccounts.com's Tumin. Balances above the cap earn a much lower rate such as 0.1%.

While a few banks and credit unions have been paying 2% or more for several years, the interest rate is not guaranteed to last.

"Rates will decline by the end of the year," Brannan said.

All of the following require e-statements and a minimum number of debit card purchases each month.

Center National Bank

Site: Centernationalbank.com

Product: Reward Checking

Locations: Plymouth and Litchfield

Pays: 2.02% on balances up to $15,000

Minimum to open: $50

Required: 10 debit card purchases per month, 1 direct deposit or ACH automatic payment

St. Paul Federal Credit Union

Site: Stpaulfcu.org

Product: Simply Checking

Locations: Two in St. Paul

Pays: 2.99-4.99% on balances of $10,000-$20,000

Minimum to open: Two $500 direct deposits made monthly from work or pension

Required: 20-60 debit card purchases per month averaging $5 or more each. Ask about qualifications for membership

TruStone Financial

Site: Trustonefinancial.org

Product: TruRate Checking

Locations: 19 Twin Cities locations; 4 in Wis.

Pays: 2.02% on balances up to $20,000

Minimum to open: $2,000. A $20 monthly fee if balance falls below $2,000.

Required: 12 debit card purchases per month

Hiway Credit Union

Site: Hiway.org

Product: High Yield Checking

Locations: 2 in St. Paul, 1 in Minneapolis, 4 in St. Paul high schools and 1 in Rose-ville opening soon

Pays: 2.02% on balances up to $25,000

Minimum to open: $1,000

Required: 15 debit card purchases in the first 27 days of each month