7 tips for choosing a savings account when interest rates rise
The Federal Reserve has raised the federal funds rate twice this year, and experts predict more interest rate hikes are likely before the end of the year.
If you are planning to move your savings account in search of higher returns, do your research. It might just pay off.
Here are seven steps you can take to select a savings account as interest rates rise.
1. Take the tour
Bank down the street can be handy, but that doesn’t mean it’s the best place to keep your money when interest rates rise.
Financial institutions already pay different rates on savings accounts – one bank may offer an interest rate of 0.01%, while another pays 1%. And just because the Fed raises interest rates, there’s no guarantee your bank will too.
That means you have to compare rates between various banks and credit unions, says Sue Davis-Gillis, senior vice president of consumer banking at Synchrony Financial. âWithout comparing rates, you might be wrong. “
Many consumers are “really struggling to part with their bank,” says Willie Schuette, financial advisor for the JL Smith Group in Avon, Ohio.
But maybe now is the right time to take this step.
2. Bypass physical banks
Often, online banks offer much higher rates than traditional banks.
While some savers may be concerned about the safety and security of online banking, these are not unrealistic deals.
The accounts are insured by the Federal Deposit Insurance Corp., or FDIC, just like a traditional bank. Many are owned by major players in the financial services industry, such as American Express and Discover. Others are the online divisions of physical banks.
Because they don’t have branches, online banks are cheaper to operate and can pass some of those savings on to you in the form of higher interest rates. And many will accept customers from all over the country. Compare the savings account rates of online banks and traditional banks to make sure you’re getting the best return.
3. Look local
If you want a financial institution that you can visit, consider a credit union or community bank.
These “small institutions are raising rates faster than the behemoths,” says Schuette. “They want to make deposits a little faster.”
Although their rates can be higher, credit unions and community banks often have a limited number of branches, says Patricia Seaman, spokesperson for the nonprofit National Endowment for Financial Education in Denver. This could be a problem if you travel frequently and want to access a branch or toll-free ATM while you’re on the road.
But many credit unions are part of a network that allows you to bank at any member credit union and use their ATMs for free.
4. Avoid baits and switches
Some banks may offer attractive rates to encourage you to change, then lower them after a few months.
While you should keep in mind that banks can raise or lower rates on savings accounts at any time, introductory or promotional rates are designed to last only for a short time, Davis-Gillis explains.
This is one of the reasons you should do your research and read the fine print before opening a savings account, she says.
5. Stay liquid
Keep your money cash when interest rates start to rise.
Placing your money in a savings account gives you flexibility that a certificate of deposit does not. A CD requires you to lock in your rate for a specific period. It can be as short as three months or as long as several years.
âIt’s not necessarily good in a rising interest rate environment,â Seaman says.
Many short-term CDs have rates similar to those of higher paying savings accounts. Some CDs even have lower prices, Seaman says.
Let’s say you buy a one-year CD that pays an interest rate similar to that of a savings account. If interest rates on savings accounts start to rise, you are forced to keep the money in the lower rate CD until the end of the year. You would pay a penalty if you withdraw the money from the CD earlier and transfer it to a savings account.
6. Check the terms and conditions
Not all financial institutions offer the same conditions for opening a savings account.
Some may allow you to open an account with a deposit of $ 1; others may require a minimum deposit of $ 10,000.
You may also need to keep a certain amount of money in your account to earn interest. Or, you can earn a lower interest rate if you have a few hundred dollars, rather than a few thousand dollars in your account.
And some banks charge a monthly service fee if you don’t keep a minimum amount in your account.
Since the terms of financial institutions differ, read the disclosures before opening your account.
7. Put savings on autopilot
Seaman suggests looking for a bank that offers a savings account that pays high interest rates, as well as a checking account.
This way, you can deposit your paycheck directly into your checking account and then automatically transfer part of it to your savings account.
âIf you pay yourself automatically first and combine it with higher rates, your savings will grow a little faster,â says Seaman.