Interest rates are rising.  So why is your savings account still paying 0.13%?

Interest rates are rising. So why is your savings account still paying 0.13%?

Interest rates are rising, with the Federal Reserve on Wednesday boosting its key interest rate for the fifth time this year in a target 3.25%. But Americans hoping to benefit from a similar increase in interest rates on their savings accounts were out of luck this year.

Sure, interest rates on savings accounts have risen, but they’ve lagged behind the pace set by the Federal Reserve—as well as the increases seen in other interest-based products like mortgages and credit card rates, which both increased this year.

Average savings accounts paid a measly 0.13%, according to Bankrate’s weekly survey of institutions on Sept. 21. By comparison, mortgage lenders charge now over 6%a level not seen since 2008, while credit cards charge 21.59% APR on new cards, two percentage points higher than at the start of the year, according to LendingTree.

This creates a painful reality for savers: while interest rates are higher than they were nine months ago, banks are offering yields that remain well below the hottest inflation in four decades. That’s certainly better than the returns experienced by stock and bond investors this year — with the S&P 500 down more than 20% year-to-date — but the gap between savings accounts and the Fed’s benchmark rate means savers are lagging behind more .

“The real return, unfortunately, is still negative — in this case, it’s negative because inflation is still so high,” said Ken Tumin, banking expert at DepositAccounts.com. “Ultimately, hopefully if the Fed can get inflation down to more normal levels, you’ll see some positive real returns, but right now, unfortunately, they’re not.”

Banks: Flush with cash

Savings accounts provided lower interest rates before Wednesday’s hike than they did three years ago, when the federal funds rate remained flat, Tumin said. Savings rates are likely to rise in the coming days, but will likely lag behind the Fed’s 0.75 percentage point hike, he added.

For example, the average return on brick-and-mortar savings accounts in February 2019 was 0.2%, compared to the September 21st average of 0.13%.

The reason, Tumin said, boils down to the fact that traditional banks have not had to raise interest rates to attract customers, given the increase in deposits throughout the pandemic. In essence, the banks are flush with cash, which they use to fund their loans. Economies jumped during the pandemic as Americans cut spending on travel and entertainment amid government lockdowns, while an influx of cash through stimulus checks and pandemic aid helped bolster their cash cushions.

“A lot of people put their extra savings in banks,” Tumin noted. “In the last decade, there have been so many years of low interest rates that many consumers are set on low rates and may not shop around as much as they used to for higher rates, especially at brick-and-mortar banks where you don’t get a lot of rewards for shopping.”

One bright spot: Online accounts

There is an option for consumers who keep their money in traditional brick-and-mortar banks and want to be satisfied with their performance: Turn to online banking, Tumin said.

“By not maintaining the store network, this is a big cost reduction [online banks] can put higher deposit rates instead of operating branches and staff,” he said.

The average online savings account offered 1.81% in September, according to DepositAccounts.com. While this is much better than the 0.13% offered by banks, it is still below the comparative rate of 2.21% offered by online banks in February 2019.

“But 1.81% is 10 times more than brick and mortar,” Tumin noted. “You have more incentive to move your money to online banks.”

How to shop for the best price

There are many financial websites that aggregate current rates offered by a range of banks, from DepositAccounts.com to Bankrate.com and Nerdwallet.

Tumin recommends keeping your bank account with the bank you currently use, but shop around for a better savings account rate from an online bank.

Once you find a new service, you can link your old bank account to your new online savings account, he said. This will allow you to transfer money between accounts more easily, while also enjoying the highest value from the online savings account.

But read the fine print and make sure you know what services are offered—or not offered—by online banking, Tumin advised. Sometimes smaller online banks don’t have the same services or the ability to handle complex transitions as larger institutions, he noted. For example, some may not be able to handle joint or trust accounts.

“Most online banks are raising rates, maybe not as fast as the Fed, but they’re having pretty significant rate hikes,” Tumin said. “You’re going to see higher interest rates than if you keep it in a brick and mortar bank.”

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