This week, the Federal Reserve is expected to raise the federal funds rate for the sixth time in roughly two years. That’s good news for savers: Fed rate hikes are one of several factors that can encourage certain banks and credit unions to increase the rates they pay on savings accounts.
Just how high will savings rates climb by the end of the year? Some experts see them hitting 2%. That’s about 30 times the current national average.
“I would not bet against it, the way things are going,” says Dana Vas Nunes, director of deposit products at Alliant Credit Union.
That makes this year the ideal time to examine the way you bank, and to take advantage of rising rates.
Evaluate your bank
Higher savings rates will mean more money for people with deposits at online banks and some credit unions; most everyone else will come up empty-handed.
Big brick-and-mortar banks tend to respond more slowly to Fed rate increases, if they respond at all. The average rate on savings accounts at insured banks currently sits at a meager 0.07%, according to the Federal Deposit Insurance Corp.
With a savings rate, or annual percentage yield, of 0.07%, a $5,000 deposit earns just $3.50 after one year. A 1.50% APY, offered by many online banks, would earn about $75 — a decent return for little effort on your part.
Consider taking the digital banking plunge
Why do online banks have better rates than most traditional institutions?
“Online banks can offer higher rates because they’re aggressively trying to take business away from brick-and-mortar banks,” says Kristina Yee, a senior analyst at Aite Group, a financial services research firm. “And their operations are just leaner; it doesn’t cost as much to run an online bank.”
And although Fed rate hikes aren’t directly tied to savings account rates, they are one of several factors that could encourage certain banks and credit unions to increase APYs.
Diane Morais, president of consumer and commercial bank products at Ally Bank, an online-only institution, says her employer looks at several factors when deciding whether to change rates on its savings account.
“Rates being offered by competitors are often a key factor,” Morais said. “We also look at things like the general level of interest rates in the economy, including the Fed funds rate, and the overall consumer demand for deposits.”
Being able to go to a branch to get in-person help is invaluable to some people. The promise of thousands of free ATMs keeps others tethered to their brick-and-mortar bank of choice.
Despite these and other valid reasons to stick with traditional banks, people shouldn’t write off other options. Online banks and some credit unions offer significantly better rates, which are likely to continue going up this year.
Keep an eye out for high rates
This year, experts expect at least three Fed rate hikes. Online banks and, to some extent, credit unions, have steadily increased their savings rates during the most recent string of Fed rate hikes.
Robert Frick, corporate economist at Navy Federal Credit Union, is optimistic that consumers are going to see more of the same in 2018.
“I think it’s going to continue,” Frick says. “You’re going to see rates rise.”
That makes it a good idea to compare your current bank’s rates to those of others; chances are good that you could be earning much more on your savings.
Look for benefits beyond high savings rates
Along with good savings account APYs, online banks and certain credit unions provide these benefits:
ATM access: Certain online banks and credit unions offer tens of thousands of free ATMs. Some even provide monthly ATM fee reimbursements.
Fewer fees: Online banks and credit unions tend not to charge monthly maintenance fees on savings accounts.
Customer service: Online banks typically have flexible phone hours and live online chat, and are active on Facebook and Twitter.
Online tools: Top-notch tools at online banks can help you better manage your savings, and mobile apps let you pay bills, deposit checks and transfer money to family and friends.