Getting the Most out of Life

Stop Giving the Bank a Free Loan: Switch to High-Interest Accounts

By  | 

Trusting your savings to a bank makes sense, right? Stashing it under mattresses, in freezers, or buried in the backyard would leave you at risk for theft and allow your cash to lose purchasing power to inflation. But giving your money to the bank doesn’t mean it’ll just sit pretty in a vault, either. Instead, the bank uses your money to offer loans to other customers, which is why you earn interest. But many banks offer poor interest rates, so it might be time to search for high-interest accounts that’ll serve you better.

No Soda for You, While the Bank Profits

The big four banks—Bank of America, Citibank, Chase, and Wells Fargo—offer the same base rate on savings accounts: a minuscule 0.01 percent per year.

Let’s say you’re keeping $10,000 in a savings account with one of the top four banks. After one year, you’ll earn $1 in interest. That’s not even enough for a can of soda from a vending machine! In the meantime, your bank is using your money to make loans to other customers.

Continuing our example, let’s say that another banking customer needs an auto loan of $10,000 to finance the purchase of a new car. Your bank offers this customer the $10,000 at 2.39 percent interest. The customer pays $250 a month on their loan for a total of 42 payments (3.5 years). In the end, the customer will have paid $431 in interest alone to the bank. That’s an average $123 a year, all because you deposited $10,000 in a savings account. And what does the bank give you for it? One dollar.

Fortunately, if you want to avoid giving essentially free loans to the bank, new contenders in the banking space offer far more than 0.01 percent interest on savings.

High Interest on the Internet

In recent years, Internet-only banks started the trend of higher interest savings accounts. These banks, which exist exclusively online, are able to offer better deals to customers because they don’t need to fund bank branches. That means more savings go directly back to the customer.

Today, Internet-only banks, select credit unions, and a handful of brick-and-mortar banks are entering the pricing war for high-interest accounts. These interest rates are paltry compared to the heyday of the high-interest savings account, but they’re still better than 0.01 percent.

Quorum Federal Credit Union, which is based in New York but allows anyone to join, currently offers 1.00 percent on its HighQ Savings account, while GE Capital Bank, an Internet-only banking institution, and MySavingsDirect both provide 1.05 percent. None of these options require minimum deposits for interest eligibility.

When you have $10,000 in savings, the difference between 0.01 percent and 1.05 percent becomes the difference between not being able to afford a can of soda and having enough money to buy several tanks of gas or a new pair of shoes, be able to make a student loan payment, or simply add the additional cash to your savings. One dollar compared to $105 might just be enough incentive to switch to high-interest accounts. Both you and your money deserve better.