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Good consumers know that they must compare all retail goods and services before spending their money somewhere. Banks are no different‹you must also compare¾what each bank has to offer before you open an account and begin a relationship with a financial institution. That means that even when opening a simple account such as a checking account, you must do a checking account comparison. Some of the things you should look for include:
When you're searching for the right bank to trust your money with, you need to become familiar with bank rates. Bank rates are more than just potential savings account rates though; bank rates can determine many things during your relationship with your bank, including:
Before you can accurately analyze the results of your bank account comparisons you need to understand the type of accounts you are comparing and the type (or types) of accounts that will best satisfy your individual checking account needs.
Here is a brief overview of some of the different types of checking accounts available to you:
With the introduction of new investment vehicles and opportunities on a consistent basis, you may think that savings accounts have long outgrown their usefulness. But these nifty accounts aren't ready to be counted out yet‹they still have some value in the portfolio of even the most sophisticated investor. If you haven't thought about how savings accounts can help you reach your financial goals, consider these points:
When you do your savings rates comparison before you open a savings account, you will get a relative indication of the other types of rates your bank charges.
For instance, when saving account rates are high, then loan rates are probably high as well. The reason for this is that when the bank is making a large enough profit from the loans it gives they can afford to pay more in savings account rates because loans are the underlying investment for savings accounts.
If savings account rates are low it could indicate that loan rates are low. Generally, when the credit environment is slow and people are not taking out loans, the Federal Reserve will lower the federal interest rates (also called prime rate) in an effort to bolster consumer confidence and encourage consumers to take more loans. With more loans in the works it is possible that interest rates could go up on loans which would increase the interest rate in your savings account.
So remember, savings accounts are not in an ecosystem of their own. They are affected by and a result of the current credit and economic environment.
The interest rates paid on savings accounts are not just arbitrary numbers set at will by your bank. Money deposited into savings accounts is used to fund the loans issued by your bank. This includes mortgage loans, personal loans, equity loans, etc. Your bank charges interest on these loans¾in order to make a profit. The core basis for the interest rates are rates set by the Federal Reserve based on consumer confidence and borrowing activity. Your bank adds interest on top of this federal funds rate (also referred to as prime rate) in order to develop the rate it needs to make a profit.
The bank then decides how much of this rate to pay out to savings account clients and CD purchasers. Banks pay out just enough to allow their customers a return while keeping profitable. It is important to understand this because savings account rates are not fixed. Your rate could change from month to month¾and factors¾such as those mentioned above¾determine how much it changes.
As you work on your bank account comparison you will notice a rising number of online banks that you can open accounts with. The concept of an online bank does not refer to a brick and mortar bank with online account access; it refers to a bank that has no physical location but exists only in an online format so all business is conducted online, over the phone and through the postal service.
Online banks often offer attractive interest rates for their interest checking and savings accounts. Part of the reason for this is that they have less overhead than traditional banks. Online banks can have fewer employees, more efficient processes, and fewer maintenance expenses. All of this reduction in expenses can then be shifted over to customers in the form of attractive interest rates and lower loan rates.
Online banks are great resources for busy professionals, individuals with personal accounts, investors interested in CDs and more. Online banks, like their brick and mortar cousins, should be FDIC insured and should follow all financial regulations established for traditional financial institutions.
|Jennifer Mathes, Ph.D.|