Best Interest Rate Banks

This week the Federal Reserve, after their FOMC meeting, announced that they would be raising the federal funds target rate from a 0.00%-0.25% to 0.25%, which essentially raising the federal funds rate. IAt a time when interest rates have been falling very very quickly, with some banks seeing their rates fall several times last month, this cold be a sign that interest rates will slow their fall. While I still reiterate the recommendation that you try to lock in rates with CDs, this is certainly a good sign for savers out there looking to get something for their good behavior.

In other Fed related news, the FOMC also said they’d be buying $750 billion more agency mortgage-backed securities, which would bring the total purchases up to $1.25 trillion. It would also buy up $300 billion in longer-term Treasuries to help credit markets and expand the TALF (Term Asset Backed SEcurities Loan Facility) to include other assets.

The allure of a high yield savings account with a reputable online bank can be very strong. One of the biggest risks of banking online has to do with the fact that you’re banking online! The internet, while secure in some respects, is still a dangerous place. There are software programs that will record everything you type and send it off to a thief’s computer. There are malicious emails floating around that are designed to trick you into entering your username and password on a fraudulent site.

Here are a few helpful ways you can protect yourself:

• Use a bank with strong protections: A username, password, and special picture is only the beginning. Banks have begun adding a plethora of special login procedures ranging from passcode fobs to dozens of questions to on-screen keyboards. HSBC Direct has a somewhat annoying login requirement that you click buttons on an on-screen keyboard in order to log in. While annoying, that on screen keyboard nullifies key-logging programs because you don’t enter in that special password.
• Never click on an email: If Bank of America mails you a special message, type bankofamerica.com directly into your browser and log in there.
• Don’t ever call a phone number in an email: Another common phishing technique is to tell you to call a special number, which goes to the thief or one of his associates. If you need to call someone, call the number on the back of your debit card or off their site. They can transfer you to somewhere else.
• Use FireFox or Chrome: IE is notoriously bad about security, you can do better with FireFox or Google’s Chrome browsers.
• Don’t use an insecure network or computer: If you’re in a Starbucks or Panera, don’t use do any sensitive banking; wait until you get home. Don’t log into anywhere at the hotel’s business center. If it’s not your personal computer, don’t use it.
• Update your anti-virus and anti-spy-ware software packages: That funny video you watched last week may have installed some bad stuff on your computer, keep your anti-virus and anti-spy-ware software applications up to date at least once a week if not more.

Thieves are getting more and more clever, but by taking some simple precautions you make yourself a much harder target.

It looks like the best days of the high yield savings account may be behind us, to be replaced by high interest reward checking accounts. Reward checking accounts are often offered by smaller local banks and sport yields of close to or above 5% APY. They’re able to give such phenomenal returns, given our current rate environment, because they have requirements that are a little tougher to fulfill. The standard reward checking account will often require that an account holder:

• Make 10-12 debit transactions per month,
• Sign up for paperless statements,
• Setup a direct deposit.

The only requirement that ever gives anyone trouble is the first one, 10-12 debit transactions a month. Unless you are sure you can make it, I wouldn’t sign up for an account because if you don’t make 10-12 transactions, the interest rate often falls to 0% (or some other small number). Another gotcha they have is that you can only deposit a certain amount of money into the account, usually a limit of $25,000 or $50,000. Of course, that’s a lot of money, but it’s good to be aware of those limitations.

How can they offer such great rates? The transaction fees on those debit transactions. You, the consumer, don’t pay a penny extra, the fees are taken from the store you buy from; so there’s no catch for you. Also, banks save a lot of money when they don’t have to mail you statements (they save trees too!), so that’s additional cost savings they can pass along to you. Finally, the direct deposit isn’t a money making ploy on their part, that’s to increase your affinity with them and keeps you from leaving as easily.

All in all, I wholly recommend reward checking accounts.

WTDirect sent out an email to account holders notifying us that they would be increasing the security of the login process. They’ve added a few new features that other banks have been using such as separation of the User ID entry and the password entry, addition of a picture, and new Security questions. As is the case with other online banks and brokerages, they will let you register your computer as well so you won’t have to go through the process every single time.

Here’s the email:

We’ll soon be introducing additional security measures to further protect online access to your financial information.

These new security features add a layer of protection to help us verify your identity, and help assure you that you are using the genuine WTDirect website. Your Password will now be on a separate page from your User ID, and we will ask you to confirm your chosen Security Image and Caption at Log In. We may also prompt you to answer one or more new Security Questions before permitting access to your accounts. For example, if you attempt to log in to WTDirect.com from an unrecognized computer, we will ask you to answer one of your new Security Questions and Image/Caption to ensure that you are permitted access.

As part of the introduction of these new measures, the next time you log in to WTDirect.com, we’ll request that you select and provide answers to two Security Questions and select an Image/Caption that will be used as additional identification.

These new security measures provide another example of why you can be confident that WTDirect continues to implement ways to protect your personal information and assets.

In the world of bank deposit accounts, there is a relationship between the liquidity of an account and the interest rate your deposits earn. The interest rate is known as an annual percentage yield, or APY, and the less flexible the account, the higher the interest rate. Certificates of deposit, one of the most illiquid deposit accounts at a bank, often has the highest interest rate APY because of how inflexible it is. With a certificate of deposit, you are locking in an interest rate and will be penalized if you need to withdraw your funds before the CD matures. So where do money market accounts live in the spectrum of interest rate and liquidity? They are somewhere between a checking and a savings account.

When I talk about the spectrum of interest rate and liquidity, I’m referring to the flexibility I mentioned with the certificate of deposit. At one end you have the most liquid accounts with the worst interest rates, checking accounts, and at the other end you have the least liquid and the best interest rates, certificates of deposit.

A money market account has some of the features of a checking account and some of the features of savings accounts. They offer high yield savings account level interest rates while still letting you write checks and access an ATM, which is pretty much the best of both worlds. There are limitations though, otherwise checking accounts wouldn’t exist because everyone would use money market accounts. Many money market accounts are limited to 6 ACH electronic transfer a month and tiered interest rates. The tiered interest rates means that you need high balances to get one of the better rates out there.

The best money market account rates remain very competitive with savings account rates, so it’s usually a good bet that, as a product, it has some appeal for you if you use high yield savings accounts.

Where can you open a money market account? You can go with your local bank where you already do business or you can find one of the top MMA rates list like I referenced above and look for someone there. Remember to read the terms and conditions because they will differ from bank to bank.

With the economic woes our nation is facing, politicians would like you to spend your money faster than you can make it. They’d love it if you could max out your credit cards and put more consumer spending back into the country, but thankfully you’re smarter than that, especially if you’re reading an article on high interest savings accounts. High interest savings accounts are savings products offered by online banks that give you a much better interest rate than your standard bank. Check out the savings rate of your current brick and mortar branch and let me know what the rate is, chances are it’s 1% or much lower. It’s not unreasonable for a brick and mortar bank to offer you half a percent or even lower! If you go with a high interest savings account, you could be earning around 3% - three times even the highest rate.

Where do you find these rates? Online banks. I list the best interest rate banks on the homepage of this site, but you probably want to learn a little more about each of the banks right? No problem.

FNBO Direct: They are the online bank of First National Bank of Omaha, which first opened in 1857 and has been covered by FDIC insurance ever since its inception. FNBO Direct’s FDIC certificate is #5452 and they have four stars from Bankrate’s Safe & Sound rankings.

Dollar Savings Direct: Emigrant Bank has two online banks - Emigrant Direct and Dollar Savings Direct. Dollar Savings Direct has a higher yield, a $1000 minimum to open, and is better than Emigrant Direct in almost every way. They are covered under certificate #12054.

ING Direct: ING Direct was one of the first online banks available, known for their ubiquitous orange ball and their funny name. They are the online bank of ING Group, which is a huge international financial service company headquartered in Amsterdam, Netherlands. Their domestically headquartered in Wilmington, Delaware, and were given four stars from Bankrate’s Safe & Sound rankings.

E*Trade Bank: E*Trade Bank is affiliate with E*Trade the stock broker and if you open an E*Trade Bank account you can link it up with your E*Trade trading account, which is a good or a bad thing! They are covered under FDIC certificate #30746 and were awarded Money Magazine Best of the Breed in 2007.

HSBC Direct: HSBC Direct is the online banking arm of Hongkong and Shanghai Banking Corporation, a huge international banking conglomerate. They are covered under FDIC certificate #57890 and are headquartered in McLean, Virginia.

In addition to the high interest savings accounts, many online banks offer very competitive certificate of deposit rates. By opening up a CD, you lock in an interest rate for a specified period of time. You give up some flexibility but when minimum balances are so low, it’s easy to open a small CD just to save a little extra.

What a crazy last few weeks! Almost every major online bank has dropped their rates twice in the last two weeks. That’s right, twice! I won’t go into the exact chronology of who dropped to what rate and then dropped to what rate, but suffice it to say, your best bets right now are to lock in a good certificate of deposit rate and then try to wait things out. Forget the money markets, forget trying to get a good rate with high yield savings accounts, to ensure a good rate you’ll have to go with a certificate of deposit.

The damage, as it now stands is:

• Dollar Savings Direct - 3.50% APY
• FNBO Direct - 2.60% APY
• EverBank - 3.51% APY Promotion Rate
• WTDirect - 2.81% APY
• E*Trade - 2.50% APY
• ING Direct - 2.20% APY

With much of the bank failure panic behind us, one of the best lessons throughout the failures was that business typically continues as usual. In all the carnage, with brick and mortar banks like IndyMac and Washington Mutual (among others) failing, there wasn’t a single major online bank failure. For that, you’d have to go back to 2007 when NetBank went under in the fall/winter.

NetBank, at the time, was the largest failure in 14 years (soon eclipsed this year by many others) but those who were FDIC insured escaped unscathed. The bank was closed on a Friday and re-opened on a Monday, with ING Direct at the helm. For the customers who had under the FDIC limit of $100,000 (now $250,000), there was little change. For those with amounts above, they had to do a little extra work to recoup their funds.

In the end, an online bank failure is just like a regular bank failure - everything is fine by Monday.

If you’ve checked out the front page of Best Interest Rate Banks lately, you’ve seen the latest rates as of early January 2009 and they are ugly.

The highest rates barely peek over 3.00% and there isn’t much we can do about it. The best thing you can do is lock in a good CD rate at whatever bank you’re at and wait for better times.

One bank you might want to consider is Dollar Savings Direct with their 4.00% rate, which will likely fall very soon.

If you have the means, you might consider putting a little in the market or even in into some municipals bonds, which are offering slightly higher yields.

Bank rates will be low, and going lower, for the foreseeable future.

If your bank participates in this program, and many of the major banks do, then all of your money in non-interest bearing deposit transaction accounts is FDIC insured… with no limit!

When the FDIC announced the new deposit insurance limits last year, they included a provision called the Transaction Account Guarantee Program that insured the entirety of your balance in a non-interest bearing deposit transaction account. That’s right, through this program, you have unlimited protection in non-interest bearing deposit transaction accounts. I didn’t know about this program until I saw a notice in my local bank! The program was a trial that lasted for a month, from October 14th - November 14th 2008 and then banks had to elect coverage (they pay for the additional insurance through fees).

Non-interest bearing deposit transaction accounts are typically checking accounts and they do not earn any interest. Your standard checking account will usually apply but you should call up your bank to confirm (they may not have joined the program). The FDIC also included two other types of accounts under this protection. The first is what’s known as an Interest on Lawyers Trust Accounts (IOLTAs), which is an interest-bearing checking account for funds held in trust or escrow on behalf of a third party. The second account is they covered was an interest bearing checking account with a rate of at most 0.50%.

The coverage is separate from the FDIC coverage. This means that if you have a checking and a savings account at a bank participating in this program, your checking has unlimited coverage and your savings (and everything else) is covered up to $250,000 as normal.

This program is set to expire along with the increased coverage limits (December 31 2010) so we won’t know what will happen afterwards.