Best Interest Rate Banks

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

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.

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.

HSBC Direct announced today that their online savings account interest rate would be falling to 2.60% 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.

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 is at 2.80% and HSBC Direct is at 2.60% APY; that’s three banks offering 2.60% 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