High interest: How to choose between checking, savings, and CDs
In a rocky economy, high interest rates are the holy grail of conservative investors, especially those who don't want to invest in bonds. But in this rocky economy, “high interest” hasn't really meant much: High-interest savings accounts are returning below two percent!
Get Rich Slowly readers are just like everybody else. A couple of times a week, I get e-mail from somebody looking for higher interest rates, but puzzled about where to find them. So, inspired by a recent article in Consumer Reports Money Adviser, I'm going to run down the top choices for finding high interest rates.
First, I want to remind you all of one thing: Interest rates aren't likely to rise until the economy improves. Capital One 360 doesn't hate you. Ally Bank isn't trying to rip you off. We're just not in a high-interest-rate environment right now. The government is keeping rates low because they don't want you to save — they want you to pump your money into the stock market or the general economy. Until things turn around, we won't be seeing the high interest rates that were around back in 2006.
So where can you go for high interest rates? Let's look at some options.
In February, I wrote about how to get the best rates on your savings — safely. That article mentioned bank accounts, but it also looked at stocks, bonds, and mutual funds. Today, I'm just looking at high-interest bank accounts.
High-interest checking accounts
Many small community banks and credit unions offer high-interest rewards checking accounts, which they provide in partnership with companies like BancVue. Different banks have different names for these checking accounts, but they all share similar features. These so-called rewards checking accounts offer high interest rates — if you meet certain requirements.
You usually have to:
- Get your monthly statement online, not via snail mail.
- Log in to your account at least once a month.
- Make a certain number of debit-card purchases each month (usually around 12 — and ATM withdrawals don't count).
- Make at least one electronic transaction per month, such as an automatic payment to the electric company.
If you meet these requirements, you may still find some credit unions and community banks where you can currently earn interest rates of up to about 5 percent on at least a portion of the money in your account. At some banks, you can earn this high interest rate on amounts up to $10,000; at others, it is $25,000. Any money above that cap earns a smaller return. And if you fail to meet the account requirements in any given month, that also triggers the lower interest rate. These rates most likely are offered only to individuals who reside in the local market area of the bank or credit union. (Credit unions require you to join as a member, so be sure to check if you meet the specific membership requirements of the credit union you are interested in.)
How can these banks offer high interest rates on checking accounts? According to the July 2010 issue of Consumer Reports Money Adviser:
Some account requirements — such as banking online and receiving electronic statements — provide cost savings to the financial institutions, while frequent use of debit cards generates fees. Those savings and revenue account for the higher rates.
These accounts are localized, and you will have to search for the best bank in your area. Here in Portland, for example, Advantis Credit Union is offering 1.75% APY on their Fusion Checking (for balances up to $25,000) as long as you meet the monthly requirements (Rate as of December 11, 2016). But you may be able to find higher interest rates elsewhere in the U.S.
Use this list at Money Rates to find a high-interest checking account in your area.
In the past, Kiplinger's Personal Finance has named the Charles Schwab High-Yield Investor Checking account its “best checking account of the year.” It currently offers a 0.06% variable APY, and must be tied to a brokerage account. But if a rewards checking account isn't an option for you, the Schwab account may be a good choice. (Rate as of December 11, 2016)
However, our current research also indicates that some credit unions are offering a higher APY on their rewards checking accounts. It might be worth a look.
High-interest savings accounts
If you don't want to jump through hoops, a rewards checking account may not be the best option; you may be better off with a high-interest savings account through either a traditional bank or an online bank.
As you search for a high-interest savings account, be sure to look at online banks.
Why? Consider the following:
- Though many traditional banks (like Bank of America and Wells Fargo) have a growing online presence, they generally have lower interest rates and higher fees than online-only banks like Capital One 360.
- Security concerns are the biggest thing that hold people back from banking online. But Consumer Reports Money Adviser claims that online banking may actually be safer than traditional banking because there is no paper trail and because your transactions are digitally encrypted.
In its July 2009 issue, the Consumer Reports Money Adviser stated:
“Online banking, despite a rocky start, is becoming the rule rather than the exception.” The newsletter cites research by Forrester Associates that predicts that 76 percent of American households with Internet access will be banking online by next year.
Here are some online banks to consider:
- CIT Bank Savings Account offers a 0.95% APY on deposits of $100-$24,999 and 0.95% APY on any deposit of $25,000 or above. Henry Ittleson founded CIT in 1908 with a mission to provide financing for businesses. CIT has continued to grow, offering financing, lending and insurance to corporations in many different sectors. CIT Bank is an FDIC-insured institution, serving small businesses and consumers with CDs, savings accounts and custodial accounts. (Rate as of December 11, 2016)
- Everbank Yield Pledge Money Market offers a 1.11% first-year APY and an ongoing rate of 0.61% APY on their money market account. Everbank is an online-only bank that has been named “Best of the Web” for five consecutive years by Forbes and was also named “Best of the Breed” for online banks by Money Magazine. Everbank requires a $5000 initial deposit requirement. (Rate as of December 11, 2016)
- Sallie Mae Money Market Account offers a 0.90% APY with no minimum balance and no monthly fees, plus daily compounded interest. I don't know much about this account, but it may be worth a closer look. (Rate as of December 11, 2016)
- Ally Bank Online Savings Account currently offers a 1.45% APY with no minimum balance and no monthly fees. Ally Bank is the reincarnation of GMAC Bank and was named the best high-yield savings account of 2009 by Kiplinger's Personal Finance. (Rate as of 09 February 2018)
- Kiplinger's best high-yield savings account of 2008 was FNBO Direct, Online Savings Account which currently offers a 0.95% APY with no minimum balance and no monthly fees. FNBO has also been rated as one of the safest of the major online banks according to a study by BankRate. (Rate as of December 11, 2016)
- And, finally, there's good ol' Capital One 360, Savings Account which offers 0.75% APY on their Savings Account (with no minimum balance and no monthly fees). This is the bank I chose a couple of years ago. I've remained with them even though their rates are no longer near the top of the heap. (Rate as of December 11, 2016)
In the comments, readers have also suggested Dollar Savings Direct (Savings Account 0.55% APY, $1000 minimum, no monthly fee. Rate as of December 11, 2016) and SmartyPig (Tier 1 rate is 0.80% APY in a special goal-oriented savings account with slightly different rules than most accounts. Rate as of December 11, 2016).
High-interest savings accounts are easy and safe. You don't have to worry about meeting any sort of minimum requirements (except perhaps a minimum balance) in order to earn the high interest rate. And many online banks (and some traditional banks, too) will let you open multiple accounts so you can save for individual goals. But high-interest savings accounts have one big drawback: They generally don't pay as much interest as a rewards checking account or a certificate of deposit.
Certificates of deposit
A final option for earning high interest rates is to use a certificate of deposit (also called a CD). CDs are time deposits: You give your money to a bank and promise not to touch it for a specific amount of time. Opening a CD is very much like making a loan to the bank, which can invest the money however it wants during the period you agree to. In general, the longer you let the bank keep your money, the higher the interest rate you'll receive.
Unlike a savings account, once you put your money into a CD, the interest rate doesn't change. If, as I did in the CD above, you open a six-month certificate of deposit at 3.50 percent, and then interest rates drop to 1.00 percent (as they did after I opened this account), you still earn 3.50 percent for the entire term.
The catch is that CDs are less liquid than other accounts, meaning you can't move money in and out of them like you can with a checking or savings account. If you take your money out of a CD before it matures (that is, before the end of the term), you will be docked interest. And in some cases, you may even lose part of your principal!
You may find the best CD rates online, but don't forget to check your local bank or credit union; my credit union often has competitive rates. You can learn more about certificates of deposit (including a few tips and tricks) in the GRS archives.
Choosing a high-interest account
So, which of these options is right for you? You are the only one who can make that call. As always, the key is to shop around for an account that fits your current needs.
- Choose a high-interest checking account if you use your debit card frequently and feel comfortable ditching paper statements. Once you open the account, pay attention. If you find you are not able to meet the account requirements, don't hesitate to switch to another option.
- Choose a high-interest savings account to build your nest egg slowly but surely without any restrictions on how you can use the money.
- Choose a certificate of deposit if you know you won't need the money for a specific amount of time — or maybe to prevent you from touching the money until you need it. (I like this advice to use parallel CDs or a CD ladder as easy insurance.)
- If you want a higher interest rate and are willing to place your money in an uninsured account, explore the world of consumer finance companies. (But be very careful if you do.)
- If you are looking for higher potential returns, can stomach more risk, and are familiar with the world of investing, then look at other options, such as bonds or stocks that pay dividends.
You are probably already familiar with my own set-up. High-interest checking accounts don't work for me. I tried one for about a year and my spending habits just didn't meet the requirements. I don't think I once qualified for the high interest rate. Since learning how to use them two years ago, I have used CDs from time to time. Right now, for example, I have the money for our upcoming trip to Europe tucked in a CD, where it's earning a bit of interest until I need the money. But, as I have mentioned many times, most of my savings is with Capital One 360. (That is not to say that you should choose Capital One 360 — there are plenty of other great options out there.)
As always, I am interested to hear what you folks have to say. Do you concern yourself with finding high interest rates? Do you switch banks to find better rates? What sort of system have you found to balance your need for better yields while still letting you use your money the way you want? (And has anyone had success with personal loan sites like Lending Club?)
Checkbook register photo by lemonjenny.