After eight rate hikes by the Federal Reserve over the last two years, deposit rates are on the rise. However, you may not be seeing higher interest rates from your bank.
Although big banks have been fast to raise credit card and loan rates, they have been in no rush in raising deposit rates. Since the Fed began raising rates in 2016, the average savings account yield at banks and credit unions has only increased from 0.18 to 0.24 percent.
The good news is that you don’t have to necessarily settle for your bank’s paltry interest rate. It’s easy to earn an interest rate much higher than this average in today’s interest rate environment by exploring alternatives.
Here are four ways to get a better rate.
Shop for money market and certificate of deposit specials. Instead of raising rates on existing accounts, banks will often attract deposits by offering promotions such as a money market or CD special. These can allow you to earn much higher interest rates than your existing checking or savings account, but there are potential gotchas.
First, be aware of the promotional period of the money market account. After the promotional period, the standard rates will take effect. If the promotional period is short and the standard rates are low, the promotion may not be worth it.
A CD special has a similar issue. The CD rate is fixed until the CD’s maturity date. However, most special CDs will automatically renew into a standard CD at much lower rates. If you don’t close the CD at maturity or during the CD grace period, you may be stuck in a bank’s standard CD earning a low rate.
Look for high-yield reward checking accounts. If you want high rates without having to regularly shop for new account specials, look for high-yield reward checking accounts. These checking accounts are offered by hundreds of community banks and credit unions throughout the country. They offer rates that are often higher than long-term CD rates, and they’re not short-lived promotional rates. Many banks have been offering the same high rates for more than five years.
Although they have many great features, high-yield reward checking accounts do have drawbacks.
First, they have monthly activity requirements. The primary activity requirement is debit card usage. Typically, they require 10 to 15 debit card purchases per month. Other requirements often include direct deposit or auto payments. Most of these high-yield reward checking accounts are free with no monthly maintenance fees. Thus, if you don’t meet the requirements, you are not hit with a fee. You just won’t receive the high rate for that month.
The second drawback is balance tiers that cap the high rate to a certain balance that ranges from $5,000 to $25,000. Only the portion of your balance below the cap will qualify for the high rate. The portion of the balance above the cap receives a much lower rate.
Embrace online banks and online savings accounts. If high-yield reward checking isn’t for you and you don’t like constantly shopping for account specials, the online savings account is a great option to get better rates for the long run.
The lack of physical branches allows online-only banks to offer much higher savings account rates. As mentioned above, the average savings account yield at banks and credit unions has only risen from 0.18 percent to 0.24 percent in the last two years. This is an increase of 33 percent. During that same time, the average savings account yield at only online banks has risen from 0.72 percent to 1.33 percent, an increase of 85 percent. Many well-established online banks have been increasing yields above this average, with several now offering yields above 2 percent.
It’s important to understand that you don’t have to completely switch banks when you open an account at an online bank. You can keep your checking account at your local bank as your primary account. When you open an online savings account, you will link the account to your primary checking account. That allows you to log into the online bank website and initiate electronic transfers between that primary checking account and your online savings account.
Choose an online bank that offers checking. Opening an online savings account is the easiest way to quickly earn much more interest. You can earn even more interest by moving your checking account to an online bank. In addition to the online checking account having a higher rate, it will make it easier to keep more money in the higher-rate online savings account.
When you maintain your primary checking account at a different bank than your savings account, you will likely keep more money in the checking account to ensure you can cover any surprise bills. You add funds to the checking by initiating an electronic transfer from the online savings account. However, this transfer can take multiple days. When the savings and checking accounts are held at the same bank, transfers between internal accounts are usually instantaneous. This makes it easier to keep more of your money in the higher-rate savings account.
The bottom line: Monitor your rates and shop around. As interest rates continue to rise, you shouldn’t assume your bank will raise your deposit account rates. When you compare the rates of your existing accounts to what other banks and are offering, you’ll likely see how much more interest you could be earning. If your bank isn’t willing to compete, don’t hesitate to look elsewhere.
The internet has made it very easy to shop around for better rates and to safely move your money into higher-rate accounts.
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