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why do online banks offer higher interest rates

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movement and make your banking life easier and more rewarding! Earning more money on your savings has finally become a lot easier Б if you choose the right bank! As the Fed dials back on the manipulation of interest rates in the upcoming years, you ll see that unequivocally, these online banks and credit unions will continue to emerge as the best, smartest place to earn the best interest rate on your savings. And that time has come. Earning more on your savings After the Federal Reserve announced the year s second interest rate hike in June Б raising the benchmark interest rate by 0. 25% to a range of 1% to 1. 25% Б online banks began increasing interest rates on savings accounts. БThe returns paid on savings and CDs are a key point of competition among online banks and recent Fed interest rate increases have raised the bar,Б says Greg McBride, CFA, BankrateБs chief financial analyst. БThere is real pressure to remain competitive if these banks want to retain the deposits they have and hope to bring in more. And that competition has created a great opportunity for savers. At an online bank, you can currently earn about 100x more on your savings compared to the big, traditional banks Б which currently offer only about 0. 01% interest on savings accounts.

RELATED: According to, here are just a few of the highest rates available on accounts that don t require a minimum deposit: Barclays: 1. 20% Synchrony Bank: 1. 20% Ally Bank: 1. 20% American Express Bank, FSB: 1. 15% You can see all current savings rates at. As banks continue this competitive trend, more and more of them will likely begin to offer higher interest rates on savings. So how do you choose? In a rising rate environment, moving your short-term savings to a high-yield account can be very beneficial. However, you don t want to make a decision based solely on the interest rate. According to Bankrate, you need to consider all of the terms and conditions associated with the account to make sure it s the best fit for you and your personal needs. Plus, you need to be saving on a consistent basis to really take advantage of the higher interest rate. Having multiple savings accounts is also an option. Rather than bouncing around looking for the best rate, you can keep savings in different accounts at different banks Б you just need to be able to keep things organized and come up with the best system that works for you. post-header-simple. icon {width: 1. 5em; margin-right:. 5em;fill:#333}. post-header-simple. icon,. post-header-simple. text {display: inline-block; vertical-align: middle;} Keep in mind that if you decide to open a savings account with an online savings bank, many require that their customers link their accounts to another bank.

That way, if you deposit cash into a checking account at a walk-in bank, say, you can move those funds electronically between your online bank and traditional bank. Traditional banks can also be convenient to use for other reasons, such as ATM access and other bank services. If you're considering opening an online bank account, take these steps. Check the interest rate yields. Compare online bank yields at sites such as DepositAccounts, Bankrate, and MagnifyMoney. Keep in mind that some sites list banks that advertise with them first, but don't necessarily offer the highest rates. One of them is Bankrate, but you can re-sort the list by APY. At DepositAccounts, look below the list of sponsors to see the banks with the best APYs. (You can also register with the site and the list of sponsors disappears. ) At MagnifyMoney, the results are sorted by APY by default, so the top ones have the highest rates. See how often the yields change. The banks offering the highest yields today may not offer the best ones next month.

But you can check to see how consistently they maintain their yields at DepositAccounts. Some institutions, including and are usually among the highest payers, and others top the list only to later fall way below the competition, Clements says. Read the bank's terms and conditions. Find out whether there are minimum deposit requirements to open an account or earn the top interest yield. Also check for fees. for instance, charges $4 in any month the account falls below $500, $5 if the account is inactive for 12 months, and $25 if you close the account within 180 days of opening it. Look for restrictions on the number of withdrawals or transfers you can make. Many banks limit customers to six withdrawals each month, and some limit how much you can withdraw at any one time. AbleBanking, for instance, limits daily withdrawals to $25,000. It's a good idea to know how the bank handles closing an account, should you decide to do that. Closing an account at the wrong time can cost you, notes McBride. At some banksвincluding, and вif you close your account before any accrued interest has been paid to you (usually once a month), youвll lose it for that period. Look for account features. Find out whether you can use the account to pay bills and withdraw money at nearby ATMsвand whether you'll be charged a fee for using those ATMs.

Also see whether you can designate beneficiaries in case you die. Some banks make this easier than others, Tumin says. Avoid long-term CDs. In addition to high interest on savings, online banks offer significantly higher yields on certificates of deposit. But with yields rising across the board, you may want to think twice before locking money up in an online banking CD. Interest rate yields on standard savings accounts may quickly catch up to CD yields. If you invest in a CD, Clements recommends that you limit the maturity to 12 months or less. Keep tabs on the yields the bank offers. Check yields at least every few months to make sure your account is still competitive, Tumin says. But one caution: To attract new customers, some online banksвincluding, Popular Direct, and Salem Five Directвraise their yields but don't pass along those increases to existing account holders, says Tumin. Check your account to see how much interest you are being paid and compare it with what the bank is advertising. If you aren't getting the advertised rate, ask for it and you'll probably get it, notes Tumin. That's a different practice than at most banks, which typically apply their yields to all account holders automatically.

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