When I first started saving money, I put it in an account with a local credit union. While credit unions generally pay higher interest rates than banks, to my dismay, the ones at mine still weren’t very high. One day I found out about the existence of online banks, which frequently offer higher interest rates on savings while letting you do all your banking online. I switched, and I haven't looked back since.
Unfortunately, I started saving right when interest rates on bank accounts began to plummet. For the past few years, rates on checking and savings accounts have been so low that it really hasn’t been worth investigating whether I could earn more on my savings.
Thankfully, interest rates have risen recently. They still aren’t amazing, but they’re a start. Is now a good time to switch banks for a higher interest rate? Here’s what you should consider.
Investigate What Interest Rates You Can Earn
If you’re wondering whether you can earn more on your savings, the first thing to do is to investigate your options. Locally, you might do better at a credit union than a bank, but some banks do offer special accounts with higher interest rates. You can research which credit unions and banks have the highest interest rates by visiting each option’s website, but if that fails, you can always give them a call or drop by.
Usually, the same few banks compete for the highest interest rates, but the one that offers the highest rate at any given point in time may change.
When you find a few banks with high rates, research their websites and services to make sure that they’ll be a good fit for you.
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The Benefits of Online Banks
As you begin the process of switching banks, also consider whether online banking may be a good fit for you. If you find yourself irked by the amount of time you spend waiting in line for the teller, you can save yourself the grief and switch to online-only banking, and still obtain the same breadth of services you would at a traditional bank.
“Online banks usually have a great online and app interface,” says credit industry analyst Greg Mahnken of Credit Card Insider. “Since there’s no branch, the bank needs to have your online transactions go smoothly.”
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“In the same vein, these banks tend to offer great customer service, Mahnken adds. “I’ve personally never been on hold for more than two minutes when calling Ally or Discover.”
The Drawbacks of Online Banks
However, online-only banking isn’t for everyone. “Online banks have great offers, but some people don’t trust them because they can’t go into a branch and talk to someone,” Mankhen says.
If an in-person interaction is necessary to give you peace of mind, you’ll want to take a more traditional route.
Some popular internet banks include Ally, Simple, and Marcus. All three are easy to use, but it can be difficult to deposit cash into your account (you’d have to go to a separate bank and fill out an ACH Transfer).
Individuals who are more inclined to spending physical cash might be better off using SoFi, Axos, or Varo, all of which boast having no ATM fees for withdrawals and deposits. Assess your personal spending habits to figure out which online bank is best for you.
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Once you have a couple of candidates, move on to the next step.
Calculate the Difference in Interest
Before you go ahead and switch bank accounts, first see how much more interest you’ll earn at the higher-interest-rate banks. Let’s say that you have $20,000 in savings and you’re currently earning 0.75 percent interest. At that rate, you’ll earn $150 in interest in one year.
If you could instead get a rate of 1.2 percent, your interest would be $240 — an increase of $90.
Use an interest calculator to compare your current interest income against that of another bank, then compare these calculations to determine if and when you should switch financial institutions.
Don’t Forget About Fees
While earning more interest is awesome, sometimes that comes at a cost. Make sure to compare the fees that your current bank charges with the new bank’s fees. If the difference between the old and new bank’s fees is lower than the amount of increased interest you’ll earn, you’ll probably want to make the change.
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How to Switch Banks: Dealing With the Challenges
Fees and interest rates aside, the real reason many people never switch bank accounts is that it can be a hassle. Considering how much of our personal finances are handled digitally and automatically, a change in your bank can spill over and affect other facets of your life.
Dealing With Automated Finances
For example, do you have your paycheck directly deposited to your accounts? If so, you’ll have to fill out some new forms when switching banks.
“Any direct deposit would have to be transferred to the new bank and your employer would have to be notified that the bank they’re paying to is no longer valid,” says Brooke Raulin, marketing director of financial fraud recovery firm The Chargeback Company.
Managing Opportunity Cost
There’s also the opportunity cost in terms of the time (and effort) required to close and set up a new account.
“Many of these banks require you to meet with them face-to-face before closing or setting up a new account,” Raulin adds.
“This could take up to an hour of your time. Closing an account online isn’t an option for most banks.”
Even if you switch to an online bank, you’ll likely have to wait a few days for your money to transfer, which can be inconvenient if you need funds for a last-minute expenditure. You’ll also have to set up your new bank account with every vendor to which you make online payments, in addition to notifying all companies that automatically charge your bank account for recurring purchases.
For many, this is too much effort for only a few more dollars of interest. However, if you’ll earn a couple of hundred more each year, it may be worth it.
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Why Do People Switch Banks?
Many people express a desire to change banks but opt not to do so due to the inconvenience of transferring funds and setting up new accounts. That said, there are a number of irksome factors that motivate people to change financial institutions. We scoured the web and asked financial experts to list some of the common reasons:
1. Poor Customer Service
Complaints about financial bedside manner are fairly common in the banking industry, with financial institutions in both the U.S. and the U.K. having uniformly low rates of satisfaction, according to a survey by customer service insight firm Clarabridge. As such, it’s one of the reasons people decide to try their luck elsewhere.
2. Convenience of Use
If a bank has weird hours (which is dumbfoundingly common) or provides little service via their online app, customers will make the switch.
“Consumers frequently have an ‘all banks are equally as bad’ mentality and focus on the convenience factor,” Raulin says.
“In our instantaneous world, it’s obvious that people will choose a bank that’s closer to their house.”
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3. High Fees and Better Interest Rates
Of course, besides user experience-related issues, cash rules everything around us. If a customer feels they’re being ripped off, or feels their money could be better off elsewhere, they’ll opt for a better bank.
This is part of the reason many individuals have transitioned to digital banking. “With regards to digital banks, they give higher interest rates compared to traditional banks, in addition to lowering fees,” says financial services blogger and former investment banker professional Pratibha Vuppuluri.
Why Not Just Switch Your Savings Account?
If you think switching banks is too much of a hassle, even for hundreds of dollars, don’t give up yet. Instead of switching both your checking and savings accounts to a new bank, you can just open a savings account at an online bank. This way, you can allow the bulk of your cash to sit in an account with a higher interest rate.
You’ll generate a bit of extra cash and avoid the inconvenience of moving a checking account at the same time.
The only minor hassle you’ll have to deal with is linking your checking and savings accounts so that you can make transfers between them. Thankfully, that’s a relatively simple process at most banks that pay higher interest rates.
Take the time to check whether your bank’s interest rate is competitive and whether there are any fees to change banks. Then you can determine whether you should switch bank accounts.
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Key Reasons to Open a Savings Account
A savings account is far more than a place to stash funds for a rainy day— it can be an incredible tool in:
1. Finding Financial Freedom
If you’re living paycheck-to-paycheck, your savings account can provide some nice cushioning in the event that you lose your job or have to take a temporary leave of absence.
“Having a savings account as opposed to a checking account is important for a variety of reasons, first and foremost as a place to build an emergency fund,” says Mike Molitoris of Flagship Wealth Management Group.
2. Building Extensive Wealth Over Time
By saving as little as $50 a month in your 20s, you’d have over $30,000 in additional funds by the time you retire, provided you leave the professional sphere in your mid-60s and have an account with an annual percentage yield of 1.35 percent.
Better yet, if you invested $50 a month in an exchange-traded fund (ETF) for 40 years with a modest annual interest rate of 5 percent, you’d have over $70,000. While they can’t provide an overnight solution to balancing the risk and reward that come with investing, interest on a savings account or ETF provides a steady, risk-averse way to build wealth over the years.
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3. Eliminating the Temptation to Spend
It’s much easier to waste money if it’s sitting around your checking account, ready to be burned. By putting away extra cash in a designated separate account, you’ll avoid spending it on unnecessary items.
Additional reporting by Connor Beckett McInerney.