Best Interest Rate Banks

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 3.00% APY (from 3.25%) 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.

HSBC Direct announced today that their online savings account interest rate would be falling from 3.50% APY to 3.25% APY. While this isn’t enough to cause anyone to withdraw their funds to put it in another bank, it’s enough to change where people will put their next dollar. FNBO Direct’s rate is still 3.50% APY and WaMu has a 3.75% APY rate, though recent concerns about their liquidity has damped people’s enthusiasm for them.

On the flip side, if you want a good rate from your funds at HSBC Direct, they do offer a 6 month CD now for 3.75% APY.

I mentioned in a post last week that online bank sites can sometimes go down without any warning and that one way to mitigate that risk is to establish bank transfer links in both directions. Another way to mitigate this risk is to simply open two accounts and spread your assets across both of them.

Right now, Washington Mutual is offering 3.75% APY, FNBO Direct and HSBC Direct are offering 3.50% APY; that’s three banks offering 3.50% to 3.75% APY for total coverage of $300,000 FDIC insurance. If you have over $300,000 in assets you are putting in savings accounts, you should talk to a financial advisor. Otherwise, you’re like us and can safely spread it across those three banks and mitigate the risk that any one of those accounts could become inaccessible without giving much interest.

HSBC Direct recently went down for the count for a few days because of technical issues, I hardly noticed because I had my assets spread across multiple banks such that in a dire situation I can still access my cash. I also happen to have external links to my HSBC Direct account and could initiate a transfer out if necessary (the bank was fine, online access was just shaken up).

So, if you’re wary about online banks, diversify this small risk by spreading your money across different accounts.

This little public service reminder is for all the folks who have an account at HSBC Direct. HSBC Direct’s rate of 3.50% APY is set to expire on September 15th, 2008. We don’t know yet what the new rate will be but the expiration date is a mere week away. The last time they extended the rate, they announced it at least a week ahead of the expiration date, so it stands to reason that the rate may slip from that 3.50% APY number.

While no high yield interest rate on any savings account is set in stone, they aren’t CDs, the other banks with high rates include Washington Mutual with a savings & checking combo offering 3.75% APY and FNBO Direct’s savings account offering 3.50% APY.

One of the nice things about a brick and mortar bank is that you can always go to a brick and mortar bank no matter what. When IndyMac bank failed and was taken over by the FDIC, you could at least go to an IndyMac branch. Sure the lines were long, the people were miserable, but your money was inside and you could get to it.

Actually, your money was not inside. Your money was in the ether, a series of 1’s and 0’s, and you couldn’t actually touch it unless it was locked inside a safe deposit box. Your money was with all the other money, a line item in an electronic register on the bank’s mainframe computers. It was just as safe as having it on an online savings account.

Your money is no safer at a “regular” bank than an entirely online bank.

The only thing that protects your assets at a bank is FDIC insurance. If the Federal Deposit Insurance Corporation is insuring the funds at your bank, and you can confirm this with the FDIC Bank Find tool, then your assets are protected up to $100,000 no matter what.

This means that you’re making a mistake if you don’t open an account at a bank like FNBO Direct or HSBC Direct because they’re just as safe and they offer much higher interest rates.

If you have multiple online accounts, one good trick is to electronically link the two accounts together to facilitate the transfer of funds between them. All you need to do this is each bank’s ABA routing number and your account number to set up the link.

Some banks, like ING Direct, will require that you provide a paper check in order to create the link whereas others, like FNBO Direct and HSBC Direct, don’t require a paper check. So, if you want to link ING Direct to FNBO or HSBC, simply create the link on the FNBO/HSBC side and initiate transfers that way.

Here are the ABA routing numbers for the major online banks:

• FNBO Direct: 104000016
• HSBC Direct: 022000020
• ING Direct: 031176110
• Emigrant Direct: 226070319
• Virtual Bank: 067092200
• E*Trade Bank: 256072691
• WaMu: 322271627

By establishing the links, you give yourself the opportunity to transfer funds easily between accounts as you need them.

“Rate chasing” is when you shift your funds between high yield online savings banks in an attempt to get the highest possible interest rate for your savings. The question on the table is whether rate chasing is “bad” for you, either from a savings or a credit perspective.

The answer is no. The act of opening a new bank account isn’t a negative event on your credit history. Some banks will do a hard inquiry, some will do a soft inquiry, but in general it is not seen as a negative event on your report. If you were to open a line of credit, that would be seen as a more negative event than opening a bank account.

As for whether it’s bad for your savings, it’s a little bad. You lose interest on the funds as they are being transferred so it takes a pretty big interest rate difference to make it worth it. However, it’s good to have a couple of them available for when you are moving new funds into the “high yield savings account” group. That way you can push it to the largest yielding account.

Who are the leaders now (As of August 1st, 2008)?

• Washington Mutual - 3.75% APY
• FNBO Direct - 3.50% APY
• HSBC Direct - 3.50% APY

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.

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.

We here at Best Interest Rate Banks like to keep things nice and simple. On our homepage, we list the best banks we know of along with all the important details you need to make a good decision on where to put your funds. All the banks listed will be online banks with a savings and/or checking component that will earn you the highest interest rates possible. You won’t find 1.0% APY interest rate banks, each is going to beat the federal funds rate by a healthy margin.

Here, in the articles section, we’ll discuss numerous issues pertaining to the banks, best practices, and any other ideas we believe are worth understanding when dealing with banks. Don’t lock yourself into a 3.0% APY certificate of deposit when you can just put it in HSBC Direct and get 3.50% APY plus the flexibility to move it wherever and whenever you want to.

That’s just a brief introduction to what you can expect here.