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With eight Federal Reserve rate hikes in the past couple of years, banks are finally raising interest rates on savings accounts. You might not have noticed this trend if you still use a traditional bank, though.
In fact, refusing to consider moving your savings to an online bank can cost you a lot of money.
While interest rates have risen at both brick-and-mortar and online institutions, they’re a whopping 454 percent higher at online banks than at traditional banks, according to Ken Tumin, founder of DepositAccounts.com.
He reports on CBS MoneyWatch that over the past two years, the following increases in the average annual percentage yield (APY) have been seen:
- At banks and credit unions (the vast majority of which are brick-and-mortar institutions), from 0.18 percent to 0.24 percent
- At internet banks, from 0.72 percent to 1.33 percent
If you do a little research, you can gain even more. One shortcut to finding the best interest rate for your money is to use a free online resource like Money Talks News’ savings account comparison tool.
Tumin notes that some online banks offer APYs of as much as 2 percent.
“Suffice to say, consumers are losing out if they stick with their longtime brick-and-mortar banks and don’t switch to an internet bank,” he says.
Why online banks can offer more
Online banks, also known as internet banks, don’t operate branches, which is key to the financial advantages they tend to offer customers.
As we note in “10 Tips for Finding a Bank With More Bang for Your Buck”:
“They don’t need to maintain a network of brick-and-mortar branches, so their expenses are lower, which can mean they pay higher interest rates and charge lower fees.”
Still, a lot of people are unaware that switching to an online bank is an easy way to dramatically boost their returns.
A recent WalletHub survey found that 62 percent of people do not know that online-only banks offer higher interest rates and lower fees than their brick-and-mortar counterparts.
If you’re worried that internet banks are not as safe as traditional banks, fear not. Money Talks News founder Stacy Johnson explains why in “2-Minute Money Manager: Are Online, Internet-Only Banks Safe?“:
“I get this type of question a lot: ‘Are online banks safe?’ Short answer: Yes, online-only banks are safe, providing they have FDIC insurance. The Federal Deposit Insurance Corp. is what insures bank accounts. Taxpayer dollars support the FDIC. So, if a bank has FDIC insurance, your accounts are insured up to $250,000.”
To find out whether a banking institution is FDIC-insured, search for the bank using the FDIC’s free BankFind tool. It will tell you whether the institution is actively insured and related details.
The bottom line: Don’t overlook switching to an online bank. And if you have an online account now, think twice before moving those savings into a traditional bank account. You could risk sending 454 percent in future returns down the drain.
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