At a time when consumers can barely squeeze out a 2 percent yield on their savings, offers to earn 5 percent or 6 percent — on a checking account, no less — may sound downright sketchy.

Yet, those rates are being offered now on checking accounts at a growing number of community banks and credit unions. These so-called “rewards” accounts were once offered by a scattered few banks, but they are becoming increasingly common, says Randy Rosen, manager of deposit research at Informa Research Services, a market research firm that has tracked bank deposit rates since 1983.

There are few factors driving the popularity of rewards-checking programs among banks. First, the way rewards checking accounts are set up can actually be as good for the bank’s bottom line as it can be for the consumers who qualify for the high yields, Rosen says. Rewards account holders are twice as profitable to banks as account holders who have regular, free checking accounts, according to BancVue, an Austin, Texas-based company that helps community banks and credit unions set up rewards-checking accounts. These account holders not only keep higher balances ($3,900 to $13,000, compared with just $750 to $1,600 for free-checking account customers), but they also stick with the product twice as long, according to BancVue. On average, rewards-checking accounts generate $450 in annual profits for the bank, compared with $200 for free-checking accounts.

Rewards accounts can also lure in customers who might open additional accounts or apply for other profitable products and services. And they can be pitched as an olive branch by an industry whose recent marketing suggests it is trying to win back the trust of its customers.

Still, these accounts can be rewarding for their holders, particularly when compared to conventional interest-earning checking accounts offered by the big banks, whose yields now average just 0.12 percent, according to Bankrate.com, but also compared to savings accounts, which sport an average yield of 0.23 percent. Their yields are also significantly higher than those most brokerages offer on their cash-management accounts, or sweep accounts. The brokerage equivalent of a checking account, these accounts yield as little as 0.1 percent these days, mainly because they invest in money-market mutual funds, says Greg McBride, a senior financial analyst at Bankrate.com. (Still, CMAs can be a convenient alternative for consumers who need a liquid place to park their cash, since they typically come with an ATM card and check-writing ability.)

Even as rewards-checking accounts offer significantly higher yields than other alternatives, they’re not necessarily the right product for everyone. Here’s what you need to know.

The Fine Print

To understand why these accounts make more money for the banks than conventional checking accounts, look at their conditions.

Most banks require that customers set up direct deposit and sign up for electronic statements, which helps the bank cut its delivery costs, says McBride. The accounts also have debit-card usage requirements, typically for at least 10 or 12 signature-based purchases each month. They ensure that the bank gets some interchange revenue: an average $6.17 per customer per month, compared with $2.18 per customer per month with regular free-checking accounts, according to BancVue. Fail to meet those requirements in any given month, and the yield you will earn that month drops considerably, to as low as 0.1 percent.

And should you plan to maximize your interest income by plunking down a six-figure amount in that account, the banks have found an easy way around having to pay you too much: the amount that earns the high yield is typically limited to $25,000. (Some banks do go as high as $50,000 or even $70,000. See table below for more details.) Any balances above those limits earn a nominal yield of 0.1 percent or so. “Because that rate is so attractive, they don’t want the interest they’re paying to get out of whack with the revenue they’re generating,” says Richard Barrington, a banking analyst at Money-Rates.com, which tracks and keeps a database of rewards checking account yields and conditions.

Location, Location, Location

Consumers shouldn’t expect rewards-checking accounts at the big, household-name banks. “The big boys are swimming in deposits,” McBride says. “There’s just no reason for them to pay up.” It’s the smaller community banks and credit unions that use such offers; they are looking to attract deposits with limited marketing budgets. (The accounts also offer an excellent opportunity to cross-sell other banking products, such as credit cards or CDs, Rosen says.)

That means consumers’ choices will vary based on where they live — or whether they qualify for membership in a certain credit union. (To get the 6.01 percent yield advertised by the United Federal Credit Union, for example, you must be eligible for membership.)

Some banks have started offering online rewards-checking accounts, giving anyone with an Internet connection the opportunity to earn an attractive yield. For example, the Sierra Rewards Checking account from Sierra Bancorp now pays 4.51 percent APY on balances up to $25,000 and 1.01 percent APY on balances over $25,000. (The bank also offers free ATM withdrawals through the AllPoint ATM network and up to $25 in other ATM surcharge refunds per month.)

A Good Fit?

Tempting as 4.51 percent or 6 percent may sound, the product is worthwhile only for customers whose banking habits are a good fit. “If I would be meeting those conditions naturally in the normal course of what I’m doing anyway, then a rewards-checking account could be a good deal,” Barrington says. On the other hand, if setting up a direct deposit or making 10 or 12 debit-card purchases a month is going to be a problem, customers may want to consider other options: a high-yield savings account or a regular interest-earning checking account, assuming they have the minimum deposit required.

Consumers should make sure the account is insured by the Federal Deposit Insurance Corporation (FDIC), through which the government basically guarantees up to $250,000 per individual accounts through 2013. (After that, the amount covered drops to $100,000.) Deposits at credit unions should be guaranteed by the National Credit Union Administration (NCUA).

Rewards Checking Programs Around the Country

Institution State APY* Monthy requirements
* Note: APY limit is up to $25,000 for all, except for Goldwater Bank, whose limit is up to $20,000. Data as of Nov. 10, 2009.

United Federal Credit Union AR, MI, NV, NC, OH 6.01% Electronic statements, 10 debit card transactions, 1 direct deposit or automatic payment. Credit Union members only.

Rio Bank TX 5.50 10 debit card transactions, 5 online bill pay payments, 1 direct deposit per month, electronic statements.

Goldwater Bank AZ 5.02 3 bill pay transactions, 1 direct deposit, 10 debit card transactions, electronic statements, minimum balance of $1,000 to avoid service charge.

Farmers Bank and Trust AR 5.01 10 check card transactions, 1 direct deposit or automatic debit, electronic statements, access online banking. Arkansas residents only. Must open account in person.

Southern Missouri Bank MO 5.01 12 check card purchases, 1 direct deposit or automatic payment, electronic statements. Missouri and Arkansas residents only.

Community Bank of Pickens County GA 5.01 10 check card purchases, electronic statements, 1 direct deposit or 1 automatic payment.

Bank 1440 AZ 5.01 Electronic statements, 1 direct deposit or automatic payment, 10 or more debit card transactions with Visa Debit Card (not ATM). Must finalize opening documents in person.

Bank2 OK 5.01 10 check card purchases, 1 automatic payment or direct deposit, electronic statements, access online banking.

CharterBank GA 5.01 10 check card purchases, 1 direct deposit or automatic payment, electronic statements.

Kansas State Bank KS 4.55 10 check card transactions, electronic statements, 1 direct deposit or automatic debit, access online activity. New account documents must be signed in person.

Bank of the Sierra Open 4.51 12 check card transactions, electronic statements, one bill pay online, one direct deposit or automatic payment. Must be opened online.

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