After four Federal Reserve rate hikes since December 2015, deposit rates have started to rise. The rise has been slow. For example, the average rate of money market accounts has risen in 2017 from 0.189 percent in January to 0.210 percent, according to data from DepositAccounts.
Even though the averages are only slowly increasing, there are a few banks and credit unions that are raising their rates faster than average. Sometimes, banks and credit unions add strings to their higher rates. These strings have been around for many years, but we’re seeing more of them today as banks try to give the appearance they are raising deposit rates.
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Here are three common strings that banks and credit unions have been increasingly attaching to their highest-rate accounts.
Intro rates. Introductory rates on money market and checking accounts have long been used by banks to attract new customers. During the intro period, the account earns an attractive rate, but after the intro period, the rate falls back to a low standard rate. Sometimes the bank will be upfront about the intro period, but that’s not always the case. There may not be any indication from the bank about how long the intro period will last. Also, there may not be any indication about what the standard rate will be after the intro period.
One bank that regularly offers intro rates is New York-based M&T Bank. The bank has been offering a money market account with a 3-month intro rate of 1.25 percent. After the intro period, the rate falls to between 0.05 percent and 0.15 percent, depending on the account balance. At least M&T Bank is upfront about the intro period duration and the standard rate that takes effect after the intro period.
If the bank is clear about the duration of the intro period and the post-intro standard rate, intro rates can be a good deal for the consumer. However, many consumers sign up for these deals with the intention of moving their money after the intro period ends. When the intro period ends, the consumers may find roadblocks that make it difficult to move their money. Minimum balance requirements and withdrawal restrictions can complicate moving your money. Early closure fees may pressure the consumer to keep the account open longer than intended. Even with no closure fees, the process of closing an account may be too much hassle for many consumers. They may decide to settle for the low standard rate.
Checking relationship requirements. When a bank or credit union offers a high rate on a money market account or a CD, a checking account is often required. The institution doesn’t just want more deposits, it wants new long-term customers who may eventually need credit cards, mortgages and other products that are very profitable for the institutions. The checking account is intended to encourage that long-term relationship. To further encourage that long-term relationship, the institution may place activity requirements on the checking account to qualify for the high rate on the money market account or CD. So in addition to opening a checking account, the customer may need activity such as direct deposit.
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An example of a high CD rate that required a checking relationship was a special 5-year CD that Ohio-based KEMBA Financial Credit Union offered in March 2017. The credit union was offering a 3 percent yield on this CD, but this yield required that the member be in the Advantage program, which required the member to have a checking account and make at least 15 qualifying transactions per month. The program also required direct deposit. Without the Advantage program, the CD yield fell from 3 percent to 2.25 percent.
Balance caps and activity requirements. Many banks and credit unions offer high rates on their checking accounts. The rates can be more than 4 percent. These are reward checking accounts, and they have two common features that allow the bank to pay the high rate: First, all have a maximum balance. The high rate only applies to the balance up to this maximum level. The portion of the balance above this cap receives a much smaller rate. Second, the high rate requires monthly activity which typically includes 10 to 15 debit card purchases and direct deposit or automatic payments.
Illinois-based Consumers Credit Union offers a reward checking account called Free Rewards Checking. This account has a yield up to 4.59 percent for balances up to $20,000. The rate falls to 0.20 percent and under for the portion of the balance above $20,000. The activity requirements for the 4.59 percent yield are extensive. They include 12 debit card purchases per month, one direct deposit or ACH debit or online bill payment per month, access online banking each month, receiving eDocuments and at least $1,000 in total credit card purchases per month.
Reward checking rates aren’t teaser rates. Many have a long history of offering high rates. However, like any variable-rate account, the bank may choose to lower rates. In the last five years, both rates and the maximum balances have fallen on many reward checking accounts. To improve the chances of your reward checking rates holding up, review the rate history before applying.
Everyone wants high deposit rates without strings attached, but with the gradual pace of Fed rate hikes, consumers should be skeptical of high rates for quite awhile. There will likely be strings attached.
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Nevertheless, consumers may benefit even with the strings attached, but they need to understand the account details and be prepared to meet the requirements.
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Deposit Rates Above 4 Percent Are Available — With Strings originally appeared on usnews.com
