The Sneaky Tricks Banks Are Playing on Savers

Here’s the good news/bad news story for savers in light of the Federal Reserve Board’s policy since late 2015 to nudge interest rates up:

Credit: Adobe Stock

The good news: Some banks and credit unions are finally offering higher interest rates on their CDs and savings accounts.

The bad news: You probably can’t get these juicier yields because of sneaky tricks the financial institutions are playing. The higher rates are often available only to new customers, people willing to make substantial deposits or those who live in the vicinity of the bank or credit union. And some deals are promotions that will vanish in a few months.

By hyping their new (but restricted), better-than-average rates, the financial institutions are “figuring out a way to get publicity without having to pay as much out in interest,” says Ken Tumin, founding editor of Depositaccounts.com, based in Longwood, Fla. “Existing customers often don’t get the benefit of higher rates and might not even know about them.”

A few examples of some of the sneaky stuff happening:

BankPurely, a new Internet bank from Flushing Bank of Uniondale, N.Y., has a 1.3 percent SavingPurely savings account; that’s 0.30 percentage points more than what Flushing Bank offers customers of its other Internet bank, iGOBanking.com. (BankPurely will also plan a tree in New York State when you open an account; sorry, no tree for you at iGOBanking.com.)

UFB Direct, an Internet bank from BofI Federal Bank of San Diego, is paying 1.3 percent on its UFB Premium Savings Account. But that’s only for balances of $25,000 and above. Under $25,000: you get a puny 0.2 percent.

Evergreen Bank has a 1.7 percent 17-month CD, but it’s available to Chicago metro area denizens exclusively (live somewhere else and you’ll earn just 0.85 percent).

Space City Credit Union pays 2.0 percent on its 2-year CD, so long as you live in the Houston area (others get just 1.25 percent) and the deal is only valid until July 31, 2017.

You may have noticed that none of these banks and credit unions with better rates are large, well-known, brick-and-mortar national institutions like Citi, Wells Fargo, Chase or Bank of America. That’s no coincidence.

Generally speaking, the Goliaths haven’t been boosting returns for their savings account customers. “I haven’t seen any kind of rate increase on their savings accounts,” says Tumin. “They’ve been pretty quiet.”

On a 1-year CD, for example, those four banks are now paying about 0.15 percent to 0.50 percent. The national average on a 1-year CD, according to Bankrate.com: 1.36 percent.

Here’s another sneaky trick some banks and credit unions are playing: When their bonus-rate CDs are up, those certificates of deposit often automatically renew at the normal, ho-hum rate the institutions’ other customers get. To avoid that, you’ll “probably have to move your money if you want to get a competitive rate,” says Tumin.

A tip: When CDs come due, they typically have a five- to 20-day grace period to get them back without incurring a penalty of some lost interest. Take advantage of those extra days. “If you go beyond the grace period, you may be stuck with a CD with a new term and a lower rate,” Tumin notes.

Don't expect many banks or credit unions to start paying their universe of savers much more anytime soon.

“Every bank wants to minimize how much it will pay out,” Tumin says. And they don’t need to attract new money these days; Americans are shoveling it in. According to the Federal Deposit Insurance Corp., bank deposits rose 6.6 percent last year, to $10.7 trillion and — USA Today says — now represent the highest percentage of bank assets since 2006.

The Wall Street Journal recently noted: “For now, bankers are happy to keep deposit yields low, standing pat even as the Federal Reserve hikes short-term rates.”

But if the U.S. economy continues to improve, Tumin surmises, people will begin keeping less money in the bank and either spend it or move some of their cash into the stock market. Those changes, along with another rate increase or two from the Fed, could ultimately lead banks and credit unions to start paying savers more. The odds of another Fed rate increase later this year, experts say, are 50/50.

So what should you do if you’d like to earn more on your savings now?

“The easiest thing [to do] to get the most bang for your buck quickly and easily is to open a federally insured Internet savings account,” says Tumin. “You’ll earn more than four times the typical brick-and-mortar savings account.”

Maybe much more. The national average for money-market accounts is 0.12 percent. But the federally insured Internet bank CIT Bank, for instance, is paying 1.30 percent.

You can find the best rates on savings accounts and CDs at sites like Tumin's Depositaccounts.com, Bankrate.com, MagnifyMoney.com, NerdWallet.com and GoBankingRates.com.

Don’t expect to earn much more on a 5-year CD than a 1-year CD currently, however, even though that was often the case in the past.

Today, the national average for 5-year CDs is 2.1 percent and the national average for 1-year CDs isn't substantially less: 1.4 percent. Says Tumin: “You don’t gain that much by going long-term.”

Another reason to shun 5-year CDs: If rates do go up later this year, you won’t want to have locked yourself into one and miss out on the chance to take advantage of the higher returns.

That said, if you really want a CD with a term of five years or so, Tumin says, first find out what the institution's early-withdrawal penalty is in case you want to get your money out prematurely. “Look for one with an early withdrawal penalty of a loss of six months' interest or less,” he says. “Unfortunately, many banks have increased their penalties on 5-year CDs to a loss of one year’s worth of interest or more.”

Before opening a savings account or CD, ask, too, whether the rate you’ll earn will depend on how much you deposit.

You might get a bump up for committing over $10,000 or $25,000.

If you locate a savings account or CD rate that’s higher than what your bank is offering, ask your institution’s manager to match it. “It’s a little harder to do that with a rate from an Internet bank compared to your brick-and-mortar bank,” Tumin says. “But if you can show that a local competitor is offering a higher rate, you have a better chance.”

And if your bank is playing one of the sneaky tricks by offering some of its customers more than you’re getting, Tumin says, “you should definitely complain to try to get a higher rate.”

Richard Eisenberg is the former Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and former Managing Editor for the site. He is the author of "How to Avoid a Mid-Life Financial Crisis" and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Read More