Best Interest Rate 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.

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.

Many of your bills can be paid annually, whether it’s your renters/homeowners insurance or your property taxes, or your trash collection fee or something else; some of those services will give you a discount if you pay them in a lump sum rather than over every month or quarter or six months. For example, my homeowners association fee will bill me every year and give me a 5% discount if I pay in one lump sum rather than two half-year payments. In some cases, the recipient is hoping to earn a little extra interest in your money but oftentimes they are simply looking to reduce their administrative overhead. Either way, you can save money simply by saving up the funds to make one lump sum payment.

The easiest way to do this is to set up recurring monthly transfers from your main checking account, where your income is deposited, to a savings account you have earmarked for this purpose. It’s simple to open up additional accounts at ING Direct, you could even name it “Annual HOA fee” and simply transfers $50 each month (in our case), then transfer that out whenever payment needs to be made.

If it’s not as important for you to have separately named accounts, I recommend FNBO Direct instead as it has a higher interest rate at 3.50% APY.

I was messing around in my ING Direct account today, opening an 18-month CD at 4.50% APY, when I saw that ING has a rollover bonus on their Certificates of Deposit. If you set your CD to non-renewing, they pop up a link next to the CD as it nears maturity with an offer of a Rollover Bonus.

The Rollover Bonus is 0.10% above the listed rate. So with the current Orange CD rates where they are, you’ll get 4.10% APY for the 12-month CD and 4.60% APY for the 18-month CD.

I’ve heard that some other banks offer this as well but this is the first time I’d seen it.

ING Direct just upped the interest rate on their 18-month CD to a very competitive 4.50% APY. If you look at the ING Direct CD rates, you’ll notice that only the 18-month term CD has been changed.

ING Direct’s Orange Savings Account hasn’t had a high interest rate in quite some time so it’s a welcome change to see their CDs starting to lead the way compared to other banks.

Some notes about their CDs - there is no minimum and an early withdrawal penalty of 6 months (this is true for CDs above 12 months).

One of the first things you do when you open a new online bank account is to establish an external transfer link between your new account and an existing account. When I opened my FNBO Direct account, I immediately linked it to my daily checking account so that I could pull some money in and get that hot 3.50% APY. For most, the process stops there. If you ever need money to go into FNBO Direct or to go back to the checking account, you can simply log into FNBO and initiate the transfer.

99.999% of the time, that’s perfectly fine. But for that 0.001%, if the FNBO website is down, you will have no access to those funds via the Internet. If you can’t log in, you can’t transfer your funds. You could always call and initiate the fund transfer that way, but oftentimes the site itself is down and you’ll have to scrounge up the number some other way. You’ll also have to get your account number somehow too.

Here’s a better way, establish the link from the other side as well. So if you have a link between FNBO Direct and ING Direct but it’s only created on the FNBO Direct side, just create it again on the ING Direct side if you can. ING Direct is picky about their links but other banks won’t be, so establish a link out that way you can still get access if you need it.

99.999% of the time, the sites will be fine. But you never know when a little hiccup can put you in a bad spot.

Less than two weeks after their last rate increase, ING Direct has updated and increased their CD rates once again, with their 12-month Certificate of Deposit going from 3.70% APY to 4.00% APY:

I’m pretty comfortable with banking online, linking my accounts together, and doing what would have been considered “crazy” only a few short years ago. The interconnectedness of my online services is so widespread that my bank accounts often see only one or two degrees of separation from one another. This level of comfort helps my financials be more fluid but it does introduce a certain level of risk.

Several years ago, I remember reading reports that Paypal was freezing accounts and withdrawing funds directly from bank accounts in fraud investigations. It was something that spurred me to build what I call an online bank account firewall.

A regular firewall in a home is a flame retardant material that separates two connected homes. In the event of a fire in one home, the firewall would prevent the fire from spreading to the other. They’re standard in rowhomes, townhomes, and duplexes these days. The computer version of the firewall is similar, it keeps the bad stuff out. The financial firewall seeks to achieve the same goal.

If there are some untrusted or somewhat risky accounts out there, simply link them to an empty bank account at ING Direct. I chose them because opening a second account there was trivial and, three years ago, they had the best rates in the high yield savings account world. All you do is create an account and link Paypal to that account.

As funds are transferred into the firewall account, move them to another account immediately. If you need to get funds to PayPal, transfer them into the firewall account first, then initiate the transfer. The account has a $0 balance at all times and so you run no risk of having your funds withdrawn without your knowledge!

ING Direct has updated and increased their CD rates:

Get your CDs! Piping hot CDs!

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.