Why I Don't Chase the Highest Interest Rate
When a bank, particularly a bank that functions without branches solely or almost completely online, wants to increase its deposits, they employ several specific tactics. The bank increase the interest rates on the savings accounts, establish a significant marketing and advertising push, and if they’re smart, offer new customer or referral bonuses. Let’s go back in time to look at some of the most recent pushes and what would have happened if you stuck with some of these banks.
In 2006, the savings account known at the time as HSBC Direct offered a high interest rate yielding 5.05% and a new customer bonus in the form of a $25 gift card. If you chose HSBC at that time or during a short time the following year when the bank tempted customers with a 6% APY for new money, you would not be in terrible shape today. HSBC Direct’s replacement, HSBC Advance — a change in name only — now offers lower interest rates, comparable to ING Direct.
In January 2008, one of the banks with the highest interest rate, OneUnited, offered 5.30% APY. Today, this bank offers a comparatively low 1.01% on the first $100,000 in each individual’s account. OneUnited is still operating, but the bank involved with an ethics scandal in Washington. Representative Maxine Waters from California, whose husband is on the bank’s board of directors and who owns stock in the company, allegedly met with the bank’s officials to help save the bank from collapse in September 2008 by securing $12 million TARP funds.
In August 2008, DollarSavingsDirect entered the scene as another offering of Emigrant Bank, in effect, a cousin to Emigrant Direct. DollarSavingsDirect was actually the rebirth of a bank specifically designed to market to Hispanic customers in New York, and to attract attention to its new online-only incarnation, offered a high interest rate of 3.75% APY. After a brief interest rate increase, DollarSavingsDirect’s rate began to decrease and fall faster than many other online banks, landing at today’s rate of 1.2%.
A marketing push and abnormally high interest rates could mean a bank is in trouble, searching for an increase of deposits to help save it from collapse. When choosing a bank, consider looking at more than just the bank with the highest interest rate at any one time.
Check historical savings account interest rates to determine which banks are consistently towards the top of the list and research stories of customer service. It rarely makes sense to move money from one bank to another every time a new bank shows up with a too-good-to-be-true interest rate or promotional bonus.
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Daily new tactics are being launched by banks these days. To enhance their business and deposits, they employ different techniques. Reading this article has given me a fair idea regarding all this. Hopefully, I will be able to avoid any trap in future.
Regarding chasing rates, my position is: Never say never… True, if you’ve a relatively small amount of cash, it’s probably not worthwhile, as previous comments here have shown. If you’ve substantially larger amounts, say $100K, and the interest rate differential is enough, say 1%, then it might be wise to chase that rate, even the rate lasts just a few months.
To each his own. I find it profitable to maintain several Reward Checking Accounts (RCAs) and to periodically open new ones as good deals appear — although those deals are becoming rarer with our protracted low savings rate environment.
Until recently, I was earning 4% – 5% on my funds in my RCAs, but one of my banks just dropped from 4.26% APY to 3.26% APY. Fortunately, I was able to open up several accounts at another bank over a month ago, each account at 4.75% APY guaranteed through 12/31/2010, so I’m shifting my funds from the 3.26% accounts to the newer 4.75% accounts.
Note that the RCAs I’ve referred to were nationally available for a very brief time, until apparently the volume of new applicants compelled the banks to make their RCAs only locally available. Although I probably couldn’t open new accounts with a bank that went from nationally available to locally available only, I’ve never had the bank close my already-opened accounts based on this.
Even if you’ve a large amount at 0.5% APY, those funds at 1.5% APY would make quite a difference. Just my take on things…
I’m with Evan. When we’re talking about a small amount in liquid assets ($10k or so), the interest earned is not enough to justify moving to a high-interest account. Considering the amount of research that needs to be done to chase rates, it’s not worth it. Also, don’t forget that you’re not earning interest during the transition period, so you’re looking a little there.
The high interest checking always made more sense to me. They make money when you swipe your card and sign for the transaction instead of using your pin. They share that money with you in the form of higher interest rates. As long as you complete a specific number of debit card transactions each month you get the better rates. At least this business model makes sense compared to just offering higher rates to attract customers.
So true. It’s not worth the time or the mental energy. Better to focus on what matters, like increasing the amount you can save.
I don’t chase rates for a different reason (nor did I back when I read your blog wayyyyyyyyyy before starting my own)…its just not worth it!
If you have $10K in liquid savings at 2% = ~$200 for the year in interest…at 3% = ~300…that’s a gain of 8 bucks BEFORE taxes. Maybe things are different when its not 10K and its 100K or 200K?
High interest rates are just a marketing ploy — or, as you stated, a sign of shaky financial ground on the part of the banks. I tend to stick to established local banks that have interest rates a bit higher than the bigger institutions and don’t suddenly drop them down to useless rates like 0.25% — or worse, like Wachovia did to me before I switched.
Good points. I jumped on the high rate bandwagon a few years ago. Fortunately, my bank (Emigrant Direct) is still in business – although they don’t have nearly as many options as ING.
It’s funny you should mention this, I’ve been wondering why my Capital One online savings account has dipped from 3.75% interest a few years ago to just over 1% interest. I guess I need to do a little more homework next time I decide to open a high-interest savings account. Luckily, I have a little more faith in CapOne considering they seem to have weathered the financial storm better than some other online banks.