Is the tide turning for savings accounts?

On the surface, savings account rates seem to be stuck in the same rut they have been in for the last couple years; but if you look a little closer, there are some isolated developments that could start to put the interest back in savings account interest rates.

According to the FDIC, the average savings account rate nationally is just 0.06 percent — a level that average first dropped to two years ago and hasn’t budged from since. However, some banks are beginning to buck the low-rate trend. Those banks remain exceptions, but the rarity of positive rate developments makes it well worth taking note of those exceptions.

Some notable exceptions conducts a quarterly survey of bank rate conditions, called the America’s Best Rates survey. Looking at the big picture, there have been no surprises in recent quarters, as the average savings account rate has dropped in each of the last two surveys. However, a review of the top 10 rates in the survey tells a different story.

Several of the banks in the top 10 raised their savings account rates in each of the last two surveys, with a few of those banks reaching the 1 percent mark. These banks are going their own way by raising rates while the overall average is still declining, and that independence makes them stand out all the more.

Seeing a handful of banks raise rates in this way also suggests that there is some healthy competition going on at the top of the rate tables. HSBC has just upped the ante in that competition, by offering a 1.5 percent rate on a temporary basis. Short-lived teaser rates are nothing new, but HSBC is pledging to keep this rate in place till January of next year. Given that savings account rates are subject to change at any time, that commitment shows that at least some banks are starting to view higher rates as a means of attracting business again.

The good news and bad news about higher rates

Besides competition among banks, there are some economic conditions that may be prompting these rate increases. There is both good news and bad news for consumers in those conditions.

The good news is that after a stumble in March, job growth got back on track in April, suggesting the economic recovery is alive and well. Economic strength increases demand for capital, encouraging banks to offer customers higher interest rates for their deposits.

The potentially negative reason rates may head higher is if inflation revs up. After falling sharply last year, oil prices are on the rise again this year, and that could push inflation higher. Interest rates would move higher in response, but this doesn’t really benefit consumers if it is offset by rising prices.

What consumers should do

Whether bank rates are pulled up by competition or forced up by inflation, consumers should not get caught waiting on the sideline. Clearly, some banks are acting to raise rates sooner than others, so here are some things you can do to get on the leading edge of this trend:

  1. Don’t assume conditions are the same everywhere. Low rates remain the norm, but they are not universal. One good thing about the banking industry is that, because it is highly fragmented, you have a lot of choices — and some of those choices are starting to offer higher rates. If your bank isn’t one of them, don’t assume all other banks are being similarly passive.
  2. Start shopping actively for rates. In business, companies adapt to change in different ways and at different times. That means that as interest rates start to turn around, banks are going to read and react to the trend in varying ways. This could cause the gap among the rates offered by different banks to widen, making this a particularly rewarding time to shop actively for higher rates.
  3. Rein in your CD terms. If you have a CD maturing soon, you might want to consider a shorter term when you roll it over. This will help you avoid locking into today’s low rates for an extended period when CD rates may be poised to start rising.
  4. Look for CDs with low early withdrawal penalties. An alternative to shorter CDs is a long-term CD with a relatively mild (i.e., six months or less) penalty for early withdrawal. This allows you to benefit from the higher rates of longer-term CDs, but still have an affordable way out if rates rise significantly. Step-up CDs, which offer the option of increasing your rate at some point during the CD terms, are also a possibility, but often these offer such a low initial rate that you would be better off shopping for a higher rate and simply paying the early withdrawal penalty if necessary.

Consumers have had a long wait for higher bank rates. Why wait around any longer, when a few banks are already starting to act on raising rates?

5 Responses to “Is the tide turning for savings accounts?”

  1. Anonymous

    Bank accounts shouldn’t matter as they are savings and checking, not part of FICO score. 10% of your FICO score is new credit. Opening 1 new CC account would not have much impact but if you opened several it would likely impact your score. I opened 3 accounts to do the above 1 checking, one savings and one CC. Only 1 would count toward FICO and then only by a small amount. According to Quicken which now gives you your score I’m at 829 so not too worried.

    Only bummer something came up and I needed some of the money from savings and wasn’t able to collect my $150 for the 90 days. So $750 instead of $900

  2. Anonymous

    I see that the HSBC offer requires at least $10K to be invested and a min $10K balance to avoid fees. Not a bad deal if it sticks around.

    Got to love bank deals:

    1. Opened Chase Total Checking and setup direct dep. received $300. No fee if DD and you keep account open for 6 months +.

    2. Opened a Chase savings and deposit $10K keep it there for 90 days and get $150. No fee as long as balance is over $300. Keep the money if account open for 6 months +.

    3. Same banker offered a Chase Saphire CC. Get bonus $400 worth of points if you charge $4K in 3 months and an additional $50 to add an authorized user. So add the wife, charge some know large expenses we had coming to that card, pay it off in full, profit.

    Yes so Chase basically is giving me $900 this year for little effort on my part. Once that 90 days is up on the $10K I’ll have to see if HSBC still has their 1.5% offer open. 🙂 Setting calendar reminder now. 🙂

  3. Anonymous

    Although rates may rise in the future I don’t think they’ll rise by much as we enter a period of low rates. Now that deflation is becoming evident in Europe rates may remain unchanged for a long time.

  4. Anonymous

    I think it will be a long time before the rate on savings accounts match the inflation rate. With federal governments keeping interest rates so low, banks have little incentives to pay depositors higher interest rates when they can get cheaper rates from the Fed.

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