Interest rates rise, with the Federal Reserve on Wednesdayfor the fifth time this year to a . But Americans hoping to take advantage of a similar rise in interest on their savings accounts have been out of luck this year.
Sure, interest rates on savings accounts have risen, but they are lagging behind the pace set by the Federal Reserve — as have increases seen in other interest-based products, such as mortgages and credit card rates, both of which have risen this year.
The average physical savings accounts paid barely 0.13%, according to to Bankrate’s weekly survey of institutions on September 21. In comparison: mortgage lenders now charge a level not seen since 2008, as credit cards charge 21.59% APRs for new cards, two percentage points higher than at the start of the year, according to LendingTree.
That creates a painful reality for savers: while interest rates are higher than nine months ago, banks are offering yields well below the. It’s certainly better than the returns that stock and bond investors are experiencing this year — with the S&P 500 falling more than 20% a year to date — but the gap between savings accounts and the Fed’s benchmark rate means savers are further behind. touch.
“Unfortunately, the real return is still negative — in this case it’s negative because inflation is still so high,” said Ken Tumin, banking expert at DepositAccounts.com. “Ultimately, I hope that if the Fed can bring inflation down to more normal levels you’ll see some positive real returns, but unfortunately that’s not the case right now.”
Banks: Flush with cash
Savings accounts offered lower interest rates ahead of Wednesday’s hike compared to three years ago, when federal funds rates remained flat, Tumin said. Savings rates are likely to rise in the coming days, but will likely still lag the Fed’s 0.75 percentage point increase, he added.
For example, the average return on physical savings accounts in February 2019 was 0.2%, compared to the September 21 average of 0.13%.
The reason, Tumin said, comes down to the fact that traditional banks have not had to raise rates to lure customers, given the surge in deposits during the pandemic. Essentially, the banks have cash, which they use to fund their loans. Savingsas Americans cut back on travel and entertainment during government lockdowns, while infusions of cash through stimulus checks and pandemic aid helped bolster their cash cushions.
“A lot of people put the extra savings in the bank,” Tumin noted. “There have been so many years of low rates in the past decade that many consumers have been conditioned to low rates and may not shop around like they used to for higher rates, especially at brick-and-mortar banks where you don’t get much benefit for shopping around.”
A bright spot: online accounts
There is one option for consumers who keep their money with traditional brick-and-mortar banks and want to increase their returns: switch to online banking, Tumin said.
“By not maintaining the branch network, this is a significant cost saving [online banks] can deploy higher deposit rates instead of exploiting branches and staff,” he said.
The average online savings account offered 1.81% in September, according to DepositAccounts.com. While it is much better than the 0.13% offered by brick and mortar banks, it is still below the comparative rate of 2.21% offered by online banks in February 2019.
“But 1.81% is 10 times as much as brick and mortar,” Tumin noted. “You have more incentive to move your money to the online banks.”
How to shop around for a better rate?
Tumin recommends keeping your checking account with the bank you currently use, but shop around for a better savings account with an online bank.
Once you’ve found a new service, you can: clutch your old checking account to the new online savings account, he said. This makes it easier for you to transfer money between accounts, while also enjoying the higher rate of the online savings account.
But read the fine print and make sure you know what services are or aren’t offered by the online bank, Tumin recommended. Sometimes smaller online banks don’t have the same services or capabilities to handle complex transitions as larger brick-and-mortar institutions, he noted. For example, some cannot handle joint accounts or trust accounts.
“Most online banks are raising rates, maybe not as fast as the Fed, but they have pretty substantial rate hikes,” Tumin said. “You’ll see higher rates than if you keep it at a brick-and-mortar bank.”