Best Interest Rate Banks

The 3.50% APY offer for HSBC Direct’s online savings account is a “promotional” offer that was extended from August 15th to September 15th. This is good news for those who pushed their funds to the higher offer. There’s still no hint as to where the rates will go after the promotion ends but with so many other banks increasing their rates, there’s a good chance the 3.50% APY will stick.

My strategy has always been to keep several of these accounts open and shift funds from my checking account into the highest rate when they are available. I don’t “rate chase” because the interest lost in the transfer can easily wipe away any additional interest earnings, but it’s good to always push to the highest bar available.

One of the best features of ING Direct’s Orange Savings Account is the referral bonus. All it takes is for an existing customer to send you an email through their system, you sign up, deposit at least $250, and you get a $25 referral bonus. Your friend get $10 for their trouble. Everyone wins!

It’s a great way to cut your teeth on high yield online savings accounts as ING Direct is one of the oldest banks around (ING is a Dutch company, they bought the great Barings Bank when it went under. Barings funded the Napoleonic Wars and was the Queen of England’s bank!) and they are here to stay (even if they aren’t, your deposits are FDIC insured).

If you don’t know anyone with an ING account or you don’t want to wait, you can get a list of links for $25 ING Direct Referrals here.

All online banks are able to be FDIC insured but that doesn’t mean that all banks are FDIC insured. High yield savings accounts at online banks aren’t any different than savings accounts at traditional brick and mortar banks, they are subject to the same rules and regulations of banks and thus are able to be FDIC insured.

Does that mean they’re all insured because they’re a bank? No. Just as you would any regular bank, you should always check that the bank is FDIC insured by using the FDIC’s Bank Find tool. A bank isn’t insured unless it’s listed in the FDIC Bank Find tool and has a certificate number.

For example, if you were looking for HSBC Direct, you wouldn’t find it under “HSBC Direct.” To find the official name, visit the website and look for it, usually at the bottom. On HSBC Direct’s homepage you will see this:

Issued by HSBC Bank USA, N.A. ©2008 HSBC Bank USA, N.A. All Rights Reserved.

That means you’ll want to find HSBC Bank USA in FDIC Bank Find, I just put in HSBC and found several hits, only one of which was “HSBC BANK USA, NATIONAL ASSOCIATION.” It’s located in Delaware and the FDIC Insurance certificate was #57890. You can click on the name for more information including office locations, main website, etc.

Too bad there isn’t anyway to search by certificate number, that would be a nice addition.

Sometimes you’ll see an interest rate followed by an APY. Sometimes you’ll see an interest rate followed by an APR. While the two look very similar, the two are actually very very different.

APY stands for Annual Percentage Yield and APR stands for Annual Percentage Rate. Again, they sound similar but they are very different.

APR is the annual interest rate without any consideration of compounding interest within that year. You calculate it simply by multiplying the periodic rate by the number of periods within a year. The periodic rate is simply how much interest is accrued per period on the funds.

APY is the annual interest rate with consideration of compounding interest within that year. You add one to the periodic rate to the power of the number of periods, then cut out the one.

A periodic rate of 1% with 12 periods works out to be:

• APR of 12% = 1% x 12;
• APY of 12.68% = (1.01^12)-1

Usually banks will say APY for the interest on a bank account, because it’s a bigger number, and then APR on loans, because it’s a smaller number. Clever huh?

When you see these high interest rate APY’s for these online savings banks, you might be wondering whether these rates are guaranteed. They’re not. The reality is that unless you’ve locked into a Certificate of Deposit, there isn’t any other account where the rate is guaranteed for any period of time. If you walk into your brick and mortar bank, the savings account rates and checking account rates aren’t fixed either.

But that’s OK. The fact is online banks are fighting each other for business and will always have the highest rates because they have the lowest overhead. If you don’t have to pay tellers and you don’t have to pay managers and you don’t have to pay rent on a building, you can pay your depositors higher interest rates.

So, rest assured that your money is getting the best rates possible when you pick a high yield savings account, even if it isn’t guaranteed.

It’s easy to let the interest rate of a high yield savings account dominate the conversation but the features of a particular bank matter as well. Is it easy to open sub-accounts? What about other ancillary products that you might want like CDs or mortgages? When the difference between interest rates is so small, and we shouldn’t chase rates, the features that decide which bank is best will dominate.

Here’s an interesting discussion of what features to look for the best bank for you.

The Federal Reserve is likely to increase interest rates in these next few FOMC meetings and that means that high yield online savings banks will begin increasing their rates as well. Already we’ve seen E*Trade increase their yield to 3.30%, inching closer to the bar that HSBC Direct has set at 3.50%. As we get closer to these future meetings, banks will start raising rates by a few tenths of a percent to entice you to move your savings from one bank to another.

Unless the rate difference is at least a 0.75% to a full 1%, I wouldn’t bother. On a $10,000 balance, half a percent is $50 if the dollars were transferred instantly. Take away taxes and you’re looking at even less. You’ll want to wait until it’s more, like $75 or $100 before you want to make the move because you lose interest when your money is between banks.

However, since the cost of opening a new account is near zero, you might want to consider opening an account at the highest current yield, 3.50% at HSBC Direct, and just move all new savings into that account for the time being.