interest rates

Here’s the govtrack page to track the Senate version.

House Approves Expediting Credit CARD Act

by Smithee on November 10, 2009

in Credit

We reported just a few days ago on the passage of a measure in the House of Representatives to expedite the Credit Card reforms passed earlier this year.

Unfortunately, I left out some of the story, as I’m still figuring out the intricacies of how laws are made, and there were some amendments made to the bill before it passed. In addition to pushing up the enactment date to December 1, 2009 and the other changes we reported, the House version would also:

ensure that changes to a credit card agreement that reduce a customer’s interest rate or other fees can be implemented immediately, instead of being subject to the 45-day waiting period required under the CARD Act of 2009 — in other words, the bad things require a delay, the good things do not
dictate that any card issuer that imposes a moratorium on increases in rates, fees and terms and conditions of a contract would be exempt from the accelerated date for the provision requiring an issuer to apply a customer’s payment in excess of the minimum amount due, to the highest rate balance — the Credit CARD Act of 2009 fixes the industry abuse of extending a balance by applying payments insincerely. If banks play along and start a moratorium, they can have until Feb. 22 to fix the balance-payment problem.
prevent the closure of a credit card account in response to the imposition of a new fee from negatively impacting a consumer’s credit report or credit score

As before, the Senate version includes no additional measures, only moves up the date to Dec. 1. There’s a general sense in the news media that the Senate version would have trouble passing (sound familiar?), but I’m not sure where the pessimism comes from, as the original Credit CARD Act passed with 90% in the Senate.

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Ally Bank Increases Interest Rate

by Flexo on August 28, 2009

When I started formally tracking high-yield savings rates, with a shared online spreadsheet, it was common to see banks offering interest rates above 5.0% APY. That was in January 2008, and the economy is in a different situation now. According to the government, there has been no measurable inflation, and now interest rates for lending are held low to stimulate the economy. Savers suffer in these conditions.

Bankers were livid this past spring when Ally Bank, a re-branding of GMAC Bank which had been tainted by the bailout of General Motors, rose like a phoenix and maintained the same interest rate it had been offering in its previous incarnation. The director of the FDIC got involved to prevent Ally from using its bailed-out position to create an unfair competitive advantage over other banks.

The bank must now be confident that it is no longer on the FDIC’s bad side. Click here for the latest interest rate from Ally Bank. It’s a small increase, resulting in only 50 cents more a year on an initial $1,000 balance. It seems to be a signal, though weak, that Ally wants to be considered a stronger bank than others, but I don’t think it’s a signal that we should expect to see more banks raising interest rates.

I do have an account with Ally Bank and you can read my review of the Ally Bank savings account here.

Today’s interest rate increase should not be enough to convince someone to move all of their money into this one bank, but if you have the inclination, Ally is a good choice for a diversified portfolio of savings accounts because at this time, I would expect they will continue offering one of the highest interest rates for highly liquid accounts and despite FDIC’s funding woes, your money should be safe.

See the review of the best online savings accounts – updated November 13, 2009.

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Savings and Checking Account Interest Rate Updates

by Flexo on June 5, 2009

A few banks have lowered interest rates offered for savings and checking accounts in the past few days. Here are a few of the new updates.

Ally Bank Savings Account is offering 2.0% APY as of June 19, 2009
Ally Bank Money Market is offering 1.85% APY as of June 19, 2009
OneUnited UNITY Gold E-Savings is offering 1.75% APY as of June 5, 2009
Presidential Bank Premiere Savings is offering 1.75% APY on balances up to $35,000 and 1.25% on balances above $35,000 as of June 5, 2009
Presidential Bank Checking is offering 1.50% APY on balances up to $25,000 and 1.00% APY on balances above $25,000 as of June 5, 2009

I have compiled a list of historical savings account interest rates going back to January 2008 yo give readers a picture of each bank’s trends. The information can be copied into a spreadsheet for further analysis if you are so inclined.

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Money Basics: Simple Interest, Compound Interest, APR and APY

by Flexo on April 22, 2009

April is National Financial Literacy Month in the United States. In most cases, schools do not extensively teach financial skills. Teenagers, highly susceptible to messages from the media, often do not have guidance from teachers, who are not trained to teach financial skills, or from parents, many of whom do not model healthy financial behavior. This series of articles at Consumerism Commentary serves to help inspire discussion about basic financial concepts. Please feel free to forward this article to someone who might benefit from a basic financial overview.

This article covers the staple financial resource for anyone seeking long-term financial stability, the savings account. This is the third article in the Money Basics series; so far this series has covered checking accounts and savings accounts.

What is interest?

Interest is a fee paid for the use of someone else’s money. Any individual or company that lends money will charge the borrower interest, always designated as a percentage like 5%. This percentage is almost always means “per year.” The most common forms of interest appear in savings accounts, where a bank pays you interest for depositing your money in the account, and credit cards and other loans, where you pay a company for allowing you to use their money for a time. Hundreds of years ago, society frowned upon charging interest, but as lending money became more prevalent for uses other than acquiring goods such as modern commerce, the stigma of interest slowly disappeared in many cultures.

The two main forms of interest are “simple interest” and “compound interest.” Simple interest is easily calculated. If you borrow $1,000 from a bank that charges you 5% simple interest, you will owe 5% more than $1,000, or $1,050, at the end of the year if you do not borrow more and do not pay back part or all of the loan. The $1,000 is a “principal.” Multiply the principal and the rate of interest (5% becomes 0.05 when multiplying) to determine the amount of interest ($50). Adding the interest amount and the principal results in the total due after one year: $1,050. With simple interest, if you don’t pay the loan back until the end of the second year, you will have another $50 to pay for a total of $1,100. Your second year of interest is based on your original principal.

Compound interest is more common than simple interest, but there are many nuances. Say the bank charges 5% interest on that $1,000 loan, but it is compounded annually rather than not compounded (simple). At the end of the first year, the first year’s interest, $50, is added (compounded) to the principal. Your second year’s interest is then calculated based on your new principal of $1,050. 5% of $1,050 is $52.50, so rather than owing $1,100 at the end of the second year, you would owe $1,102.50.

If only life were that simple. Interest can also be compounded monthly, daily, or continuously. A 5% interest rate compounded monthly, paid to you by a bank in return for your $1,000 deposit, leaves you with $1,051.16 in your bank account at the end of the year assuming no further deposits or withdrawals. That is a little more than the $1,050 of simple interest or interest compounded annually. If that same 5% interest rate is compounded daily, your ending balance would be $1,051.27. Compounded continuously, the 5% rate would also result in $1,051.27, but a fraction of a cent more than the result of daily compounding.

Banks will usually describe their compounding method in the fine print, but this is only a minor concern for savings accounts, as I’ll explain below.

Don’t be misled by interest rates and terminologies

You would think that all financial terms would carry the same definitions regardless of the circumstances in which they are used. But there is some confusion when comparing interest rates for loans with interest rates for savings accounts. Indeed, there is further confusion when comparing savings account interest rates from one bank to another bank. Here are some tips for discerning the differences.

Loans, like mortgages, are often advertised by interest rate. But sometimes, a secondary rate, is also given. The first rate on the advertisement is the nominal interest rate and the second rate is the effective interest rate; the true cost of borrowing the money including the results of compounding as well as any fees that may be charged. Consider the mortgage loan advertisement I found online yesterday.

Mortgage advertisement This ad lists an interest rate of 4.625% but the true annual cost is actually 4.879%. This advertiser calls the nominal interest rate the “rate” and the effective interest rate the “APR” (annual percentage rate), and this is common terminology for loans. Lenders are required to clearly display the true annual cost of a loan, the APR, but this often just leads to more confusion.

Unfortunately, savings accounts reverse part of this word usage pattern. A savings account’s APR usually refers to the nominal interest rate, and the true annual result, after compounding based on that particular bank’s method, is called the “APY” (annual percentage yield). For example, in our continuous compounding method mentioned above, while the savings account’s interest rate is 5%, the APY is closer to 5.127%. When banks advertise their savings accounts, they usually include the APY, leaving the nominal interest rate to be found only in fine print if anywhere. The APY is a standard metric that makes it easy to compare savings accounts across banks regardless of the type of interest, and I use APYs to compare high-yield savings rates here.

If you are thoroughly confused, you can always head to dinkytown.net, which offers calculators to help you determine a loan’s APR (true annual cost) if you know the loan’s (nominal) interest rate and fees and to help you compare how much more you would earn by switching to a savings account with a higher interest rate (APY).

Albert Einstein probably never called compound interest “the most powerful force in the universe,” though this quotation or one similar is often attributed to him. If you want to “get rich,” all you need is compound interest, preferably at a rate above inflation, and lots time on your side.

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The State of Credit, April 2009

by Smithee on April 21, 2009

in Credit

A quick roundup of current lending news.

In December 2008 we reported a prediction that credit card issuers would be reducing available credit by about 45%, and recently the company behind the FICO score released a report of credit lines being reduced from April to October 2008, right before that prediction was made.

From the study, we find that lenders reduced credit for 16% of consumers, and 31% of those affected had a late payment, collections account or public record (e.g. bankruptcy, foreclosure, garnishment or tax lien). Disturbingly, the median FICO score of those affected was 770, a very good score. So, while a smallish minority of Americans were affected, they were the best customers of the bunch: good scores with few red flags.

The better news is that the average credit line was reduced only 5%, so all other things being equal, the FICO score of someone in this group shouldn’t have been negatively affected. We’ll have to wait and see, of course, what happens to FICO scores after October 2008.

Deceptive Credit Card Practices Update

We haven’t written about this since inauguration day, but it looks like there may be movement again soon on a bill promoting the credit card holder’s bill of rights.

Lawrence Summers, a White House economic adviser said on “Meet the Press” this past weekend that the president will be “very focused in the very near term on a whole set of issues having to do with credit card abuses.”

It’s also possible that instead of passing a new law, credit card issuers may make a whole set of promises during a meeting with the president and his team on Thursday.

Then there’s the issue that banks aren’t lending what they are supposed to be. From Reuters:

Credit card issuers have received over $120 billion in taxpayer funds since October, money the government has asked them to use to expand lending.

But with U.S. credit card defaults at record highs, lenders are trying to protect themselves by tightening credit limits and closing accounts, actions that have infuriated lawmakers, consumers, and even triggered a New York state attorney general inquiry.

Bailouts Not Working?

Put too simply: taxpayers loaned billions and billions of dollars to banks who had stopped lending money to those same taxpayers, in order to get them lending again. Overall, this doesn’t seem to be working when we see headlines like “Bank Lending Keeps Dropping” and “U.S. Banks Line Up to Repay TARP Money“.

Commercial and industrial lending were down in February, but I was glad to see that Home Loan Refinancing was up 42% from January to February. Home equity lines of credit were also being processed at levels typical for the season.

Similarly, Americans feel like this is a good time to buy a house. In fact, 71% of people responded that way, the highest level in four years.

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Are You a High-Yield Interest Rate Chaser?

by Flexo on April 3, 2009

Over the last decade, on-line savings accounts have grown into prominence, first with new internet-only banks offering high-yield accounts thanks to their low overhead costs, and followed by old-fashioned brick-and-mortar banks offering on-line accounts to give the newcomers competition. For more than one year, I’ve been tracking and charting interest rate changes for a number of the more popular high-yield savings accounts to detect trends and help determine where to deposit my own cash.

With the proliferation of easily-accessed information, simple account opening processes, and almost-immediate deposits through Automated Clearing House (ACH), switching from one bank to another and moving all of your cash takes only a few days. When the economy was in a different situation and interest rates were higher, aggressive savers maximized their earned interest by transferring their balances from one bank to the next bank whose rate leapfrogged past the previous leader.

I’ve never been a fan of chasing rates, and here’s why.

1. There is more to a savings account than the interest rate. You want to find and stick with an option that provides high interest rates, but you also should seek good customer service, a comfortable website, corporate ethics, and security. This is the primary reason many people stick with ING Direct despite their comparatively low interest rates. ING Direct has a great reputation, a website that hasn’t garnered many complaints, and friendly customer service. (This bank did receive some flak surrounding their Electric Orange checking account when surprise credit checks resulted in account closings.)

2. You lose interest income in the transfer. When you transfer money from one bank to another, you may lose several days in interest, negating a portion of the bump you’re hoping to see when you move to a higher-yield account. Some electronic transfers can take three days. The initiating bank debits your account one day for the transfer. The receiving bank receives your money through ACH the next business day, but doesn’t credit your account. The bank keeps your money for a day or two, earning interest for the bank on the “float,” and finally credits your new account sometimes several days later. Some banks are worse than others in this regard; E*TRADE Bank reportedly offers one of the fastest transfers.

3. Banks will often hold your deposits for several days. ING Direct will hold initial deposits for five days. Keep in mind that one of the features of savings accounts — the reason you accept interest rates lower than what you could possibly earn in certificates of deposit (CDs), bonds, or stocks — is that they are liquid. You should be able to access and withdraw your money at any time. If your funds are held hostage for five days, you could find yourself in a predicament without access to your emergency fund. Banks often hold subsequent deposits, too, particularly when you deposit a check.

4. Past performance is not an indicator of future results. This is illustrated by the tables of historical interest rates. Here is an example: A few months ago, a “new” on-line high-yield bank arrived. DollarSavingsDirect is a division of Emgirant Bank in New York, re-branded from a Spanish language-focused branch-based bank to an on-line cousin to Emigrant Direct. This bank, like Emigrant Direct when it started years earlier, came on the scene with a high interest rate to attract new customers. Shortly after gaining attention in the media and the blogs with its stratospheric initial interest rate offering, these interest rates began to fall. When they did, the rates decreased much faster than those at other banks. Banks that were once on the top of the list of interest rates are now in the middle of the pack.

5. Most people don’t transfer enough cash from bank to bank to make the effort worthwhile. If you move $5,000 from one bank to another to take advantage of a 0.05 percentage point yield increase, you will earn at most $25. This amount may seem like a good deal for thirty minutes of work, but that’s not an income source that is repeatable.

If you have $100,000, seeking the highest interest rate may be worthwhile, but I wouldn’t suggest keeping that much in savings accounts unless you’re saving for something specific and you’ll need to access the money in less than six months. While transferring $100,000 from one bank to the next may result in worthwhile income, you should consider finding high-yield certificates of deposit and earn even more than you would with savings.

My recommended approach still involves keeping yourself informed of the best interest rates and the best overall savings accounts. However, rather than switching your money continually from one bank to another depending on who is king of the hill at any one time, I suggest depositing new money into your choice of savings account. We get into habits, thanks to the wonders of automation and direct deposit. But the choices we made years ago may not be what’s best for the present and the future. When you receive checks, consider which banks are offering you the best deals right now. Without moving your money around, you can still take advantage of the highest interest rates.

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FNBO Direct Currently Offering 2.15%, Considering SmartyPig with 3.25% APY?

by Flexo on April 1, 2009