Best Interest Rate Banks

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.

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 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.

The Fed dropped interest rates from 1% to 0.00% - 0.25% last week as a Christmas gift to the economy and the ones who will suffer are savers like you and I. Already, the top banks with high yield interest rates are dropping their savings account rates with great ferocity. FNBO Direct, which had sported a reasonably strong 3.25% APY rate, dropped their mark to 2.80%, which only puts it a hair higher than ING Direct with a 2.75% rate. Other than that, WTDirect still soldiers on with a 3.06% APY rate on balances above $10,000 but everyone else has fallen. The single surprise in all of this has been Dollar Savings Direct, a brother bank to Emigrant Direct, still offering a mind-boggling 4.00% APY when its peers are lagging in the low 3% range.

The one move I would do right now is to get myself locked into some CDs. The best CD rates are in the mid 3% and low 4% range for CD terms of less than 18 months. Lock in some short term rates so that you can be assured that your savings don’t languish. The only risk you have is that inflation skyrockets with all the Fed moves and if that happens, you can pull your money out and put them into something better. However, the smart move right now is to lock in those rates before they sink any further.

If I had to pick my top three savings accounts right this very minute, they would be, this very order:

1. FNBO Direct
2. Dollar Savings Direct
3. E*Trade

Some might be surprised at the order of the list because the top rated bank, FNBO Direct, actually has the lowest interest rate of the bunch (3.25% APY vs. 4.00% for Dollar Savings Direct and 3.30% APY for E*Trade). Let me explain that one first. FNBO Direct has my top spot because it allows up to three external links, which means I can transfer directly from another high yield savings accounts. I can do online bank to online bank transfers, three of them no less, which is something not offered by the other two. Dollar Savings Direct takes second on the strength of their 4.00% APY rate and E*Trade comes in third because I think the brokerage account link is a crucial offering (even though you can get $4.95 trades from TradeKing, E*Trade charges $9.95).

FNBO Direct

FNBO Direct takes the top spot, as mentioned earlier, because they offer those three external links. They also offer a two-year 4.26% APY CD that is one of the best out there. 3.25% APY isn’t the top rate, but a competitive one, and the interface for FNBO is clean, crisp, and responsive. FNBO Direct is the online banking arm of First National Bank of Omaha, FDIC Certificate 5452, a bank that has been out of the news but in business since 1857.

Dollar Savings Direct

Dollar Savings Direct is the same as Emigrant Direct, except it has a much higher interest rate - a whopping 4.00% APY. It’s probably tops among the well known online banks. The only downside with Dollar Savings Direct is that you can only link up one account to start (likely to be your checking account) and then all future additions must be done with a ton of paperwork. Yep, it’s a pain, which is why it gets the #2 spot.

E*Trade

E*trade takes the #3 spot of my top savings accounts because the 3.30% APY rate coupled with a easy as cake to open brokerage account gives a flexibility no other online banks offers, the ability to trade in the stock market. One negative about E*Trade is that the trades are quite expensive, at $9.95 it’s nearly twice as expensive as TradeKing and their $4.95 trades (though funding a TradeKing account can be a bit of a pain at times).

There you have it my, top 3 picks for the top savings account in all the land.

In an ideal world of instant transfers, you would always transfer your savings to the bank account with the highest rate. Choosing between a 3.06% APY (WTDirect) and a 3.25% APY (FNBO Direct)? Don’t bother, always go with the higher rate. If your money is at WTDirect, transfer it to FNBO Direct. No brainer.

However, banks have been using float for as long banking has existed and some banks float longer than others. On average, it takes about 5 days to get funds from one bank to another. Five whole days. In our era of electrons flying back and forth, it seems amazing something like a transfer would take that long, right? That’s because of the float, where the bank earns money while the money is in transit.

So, the next time you’re going to rate chase, consider how much interest you’re losing when the funds are in between banks.

When it comes to your credit, opening a new bank account may or may not affect your credit. Oftentimes it depends on the bank and their own internal processes but I’ll explain why there’s ambiguity and then which banks will ding you and which won’t.

There are two types of inquiries - hard inquiries and soft inquiries. Sometimes places will call them “pulls” or “requests” but they mean the same thing. Inquiries are when individuals or organizations request your credit history. Typically, the hard inquiries are ones where the information will be used for lending decisions, such as credit cards and mortgages. Soft inquiries are not use for lending decisions and often used for informational purposes such as confirming your identity on applications.

Unfortunately, some banks will make a hard inquiry when they really should have made a soft inquiry. The only way to know is by customer reports. Savvy customers who keep an eye on their credit score will often report whether inquiries are hard or soft. The most comprehensive and up to date list that I’m aware of is via Fatwallet.

As for online banks, according to the list none of the banks listed on the best interest rate banks homepage will do a hard pull on savings accounts. The banks that offer money market or checking accounts will often do a hard pull to determine how much overdraft protection to offer (ING Direct does this). So in most cases, opening a savings account will not affect your score.