Cashing In

by Jonathan Clements
provided by

How to play banks for all you're worth

Welcome to cash management, 2007-style.

Forget the quaint notion that you should have your checking account, credit card and savings account all at the same bank.

Instead, look to cherry-pick the best of these accounts -- with the goal of sidestepping fees, piling up credit-card rewards, earning extra interest and building a great credit score. Sound like a lot of work? It doesn't have to be.

Boosting yield.

Start by getting a no-fee, no-interest checking account with little or no required minimum balance, advises Greg McBride, senior financial analyst at Many banks now offer such accounts.

Not collecting interest might seem like a bum deal. But, in truth, this isn't a big loss. On average, interest-paying checking accounts now require a $3,300 balance to avoid fees -- and, even then, you will earn interest averaging just 0.3%, according to a recent Bankrate survey.

Result? You're better off with a low-minimum checking account and then sweeping your extra cash into a high-yield online savings or money-market account, such as those offered by EmigrantDirect, HSBC Direct and ING Direct. High-yield online accounts typically pay 4% and sometimes 5% interest.

You can link these accounts electronically to your low-minimum checking account. That will allow you to shift surplus cash into the online account so you earn interest until your next batch of expenses comes due, at which point you can move the money back.

Transfers might take 48 hours. One warning: Don't keep your checking-account balance too low -- or you might overdraw the account, triggering hefty fees. "A $30 overdraft fee could wipe out a couple of months of interest," Mr. McBride cautions.

Getting rewarded.

To complement your low-minimum checking account and high-yield savings account, you'll want the right credit cards. Indeed, if used deftly, your cards will help you to collect rewards, build a great credit score and earn even more interest.

The strategy: Pile expenses onto credit cards that pay cash back or other rewards. Until these bills come due, keep your money in your online savings account, where it will earn interest. As an added bonus, by paying off your cards every month, you should build up a good credit score.

All this comes with a few caveats. Pick your rewards cards carefully. To get a sense for what's available, check out the offerings from large issuers such as American Express, Bank of America, Capital One, Citigroup, Discover Financial and J.P. Morgan Chase.

It's easy to find a no-fee card that will give you 1% cash back, and some pay 3% or even 5% on certain purchases. But be leery of rewards cards with annual fees. Those fees probably aren't worth paying unless you're a big spender.

Ideally, to help your credit score, try to avoid using more than 10% of the credit limit on your cards, counsels credit expert John Ulzheimer, author of "You're Nothing but a Number." If you find it hard to keep below that threshold, he suggests applying for more credit cards or asking your current cards to raise your credit limit.

Finally, be careful not to overspend or you may not have enough to pay off your card bills in full, at which point you will get hit with financing charges. My advice: Keep a running tally of your monthly card charges so there are no unpleasant surprises when the bills arrive.

Because of the risk of overspending, some folks prefer debit cards, where the money comes straight out of their checking account. Problem is, debit-card rewards usually aren't as generous as credit-card rewards, and there's less chance to earn interest because you're paying for your purchases right away.

In addition, debit-card activity usually isn't reported to the credit bureaus, so your prudence won't earn you a good credit score. Still, a\ debit card, combined with a low-interest credit card, may be your best bet if you're less financially disciplined and sometimes carry a credit-card balance.

Copyrighted, Dow Jones & Company, Inc. All rights reserved.


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