A Cautionary Tale to Higher Interest Accounts

In an effort to draw more customers to them banks have begun offering higher interest savings accounts. Whereas five years ago the idea of an interest rate in excess of 2% was extremely rare nowadays many banks will offer interest rates in excess of 5%. The interest rates are 5% or higher are usually confined to online banks and smaller financial institutions but the fact remains that these rates do exist in today’s financial world. Smaller institutions offer these rates to attract customers and draw them away from larger banks and online banks offer these rates because they can afford them; no physical branches means less overhead which in turn results in the higher interest rates that these banks are able to offer.

There is no harm whatsoever in researching the banks offering the higher interest rates and the savvy consumer can easily cash in well by picking a bank with a higher interest rate that suits their own situation well. However, as people have been known to say in the past, “There ain’t no such thing as a free lunch”. This TANSTAAFL principle applies especially to banks that are specifically in the game to make money out of it. With that in mind it is important to thoroughly research any high interest savings account in order to make sure that the higher interest rates are the real deal. When researching a bank’s higher interest rate accounts it is important to keep the following things in mind:

Introductory Rates: This is a big one. Taking a page out of the book of a credit card company many banks will offer introductory rates of 5% or even 6% and then after the introductory period ends will change the rates to something below 2%. It is important to be aware of this.

Fees: Many banks will make up for higher interest rates by having higher service charges and transaction fees. Compare the fee schedules to the amount of activity you expect to have on your account to see if you actually end up making any more money with this account versus the one you currently have.

Tiered Rates: Some banks will only allow a larger interest rate if a very large balance is maintained in the account for a set period of time. Make sure you are aware of this and how it applies to you.

Article correct at its author date: March 2007. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

If you would like to display this article on your web site please email us.