Best Interest Rate Banks

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.

Sharebuilder is a dollar cost averaging brokerage firm that was recently acquired by high yield savings account stalwart ING Direct. Anyway, Sharebuilder lets you buy and hold shares of stock very cheaply, $4 a scheduled trade, and was one of the first in the discount brokerage field to really make it possible for the small investor to invest small amounts in whatever they liked. $4 was cheap compared to the $20 some places charged. Since then a lot of other brokers have appeared on the scene like Zecco with free trades and TradeKing with $4.95 trades, but Sharebuilder still holds a special place in many people’s hearts.

Another thing they offer are special signup promotions through the use of codes, something very few other brokers offer. All you’ll need to do is click through the link, enter in the promotion code when asked, make one trade, and you’ll be awarded the money.

Apply today!

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 you see FNBO Direct offering 3.25% APY for your savings, you might be tempted into thinking that you will get to keep the entire 3.25% APY for yourself. However, just like your job, you don’t because Uncle Sam will want to get his piece of the pie. Savings account interest is reported on a 1099-INT form and treated more like ordinary income and less like dividend interest. In other words, it’s taxed at your income tax bracket, rather than at the more favorable 0%/10%/15% long term capital gains rate that dividends enjoy.

How do you figure your actual, take home interest rate? Simply subtract out your taxes! If you are in the 25% tax bracket, take 25% away from the 3.25% (multiply it by 0.75), and you’ll see that you get to keep 2.4375% of the original 3.25%.

This shouldn’t really affect your thinking though, as all bank interest is treated the same so you’re comparing apples to apples on this one. It’s just important to always consider taxes whenever you talk money… the government will always to remember to collect its due.

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.

One question I’m constantly asked by readers is how online banks like FNBO Direct and ING Direct can offer such high interest rates compared to your big name brick and mortar bank. The answer is actually simpler than you think. The reason why they can offer such good rates is because they don’t have to pay for the things a regular bank has to pay for.

Let’s list all the major things both online banks and brick and mortar banks have to pay for:

• Website - including online banking
• Call centers - to field customer calls
• Mailers - statements, offers, etc.
• Marketing & advertising

Now think of the things that only brick and mortar banks have to pay for:

• Branch locations - leases, taxes, tellers, managers
• ATM locations

While each one only gets a bullet, one of the most expensive items on either list is branch location. Think about how many branches each of those majors banks has. Tens of thousands. Bank of America has thousands of branches and over 11,000 ATMs. In addition to paying for the branches and ATMs themselves, those banks have to pay for the people it takes to support them. Tellers and managers and ATM technicians aren’t cheap. They need electricity, heat, water, health care, and so many other things.

Online banks won’t give you the personal relationship that a bank will. That’s for certain, but you don’t go to online banks for great relationships, you go for great rates.

If you haven’t been watching the news, you may have heard that the 18th and 19th bank failure happened last weekend. Security Pacific Bank, Los Angeles, California, with approximately $561.1 million in total assets and $450.1 million in total deposits, and Franklin Bank, SSB, Houston, Texas, with approximately $5.1 billion in total assets and $3.7 billion in total deposits, were both closed. In both cases, all deposits were assumed by another bank, no one lost any money, and everything continued on as usual.

When IndyMac collapsed in historically gargantuan fashion, the bank was operating as IndyMac Federal that next Monday. The reality is that bank failures, to many bank consumers, simply means the nameplate on the bank’s door has changed. With FDIC insurance up to $250,000 per account holder per institution until December 2009, there really isn’t much you have to be worried about. In the 19 failures this year, each had gone seamlessly. Some people lost money if their deposits exceeded the $100,000 insurance limit but otherwise everything worked out great.

However, people are still concerned. If you count yourself as someone who gets worried about such things, there are ways for you to pick a safer bank. First, keep up on the news. These smaller regional banks can go under without any warning but the larger ones won’t. Everyone knew about the woes of WaMu long before they were purchased.

Second, you can review the ratings by BankRate and BauerFinancial. The ratings are updated quarterly so things may change in the interim but it’s better than nothing.

Finally, ensure you have less than the FDIC insurance limit of $250,000. There really is no reason to keep more than that especially when opening new accounts is so easy. Consider one of these high yield savings accounts for your savings if you find yourself over the limit.

As both banks decreased their high yield savings rates recently, ING Direct to 2.75% APY and FNBO Direct to 3.25% APY, both increased their CD rates.

ING Direct CD Rates

It looks like we’re in the world of dropping interest rates as the Fed looks to combat a recession, banks are anticipating that they’ll cut rates in the next meeting (after the emergency cut just a few short weeks ago). Today, two banks lowered their rates by a quarter of a percent.

HSBC Direct lowered the yield on their high yield savings account to 2.60% APY and FNBO Direct dropped their savings account to 3.25% APY (from 3.50%). If you’re looking for dependable guaranteed rates, look towards CDs. ING Direct just increased some of their CD rates. I keep an updated list of the best 6, 12, and 18 month CDs.