Beware the Small Print of High Interest Savings Accounts

By Silicon Valley Blogger on 24 September 2010 (Updated 29 May 2014) 3 comments

How many times have you seen ads for savings accounts that have touted superb interest rates?  And how many times have you looked into the offer only to discover that it isn’t quite what it seemed to be initially?

I’m not saying there are no good deals out there to be found.  For instance, a savings product like the HSBC Advance Online Savings Account still offers a rate that’s higher than the what an average bank account offers, plus low fees and no minimum balance requirements. However, it pays to be careful and to keep your eyes and ears open and your brain engaged when you are shopping for a place to park your cash. Those tempting posters and advertisements have always got small print –- and it’s the small print that you really need to look at more closely.

Give Your Savings Account a Second Look

Here are some reasons why savings accounts with superb rates aren’t always the delightful find you thought they were.

1. They require a monthly savings contribution.

Some institutions may require you to contribute an amount each month to your account. This may be ideal if you've got a handle on your outgo, if you’ve got a good budget and you know how much cash you’ve got left over each month.  But if you struggle to put away the same amount each time (or you even miss some months altogether) it’s no good opting for this kind of savings account.  Instead, you’ll have to pass on the interest rate and settle for something less. For a savings account that’s more customer-friendly, check out the Sallie Mae Bank Savings Account.

2. The interest rate includes a "bonus" that disappears after the first year.

The good thing about these savings accounts is that for a specific time period, you can reap the rewards from a better rate of interest.  They very often have few limits and they allow you to take out your cash whenever you want to.  But they’re banking on the fact that you will forget to close the account and go elsewhere with your money. If you do opt for this kind of account, and you're really only after that rate boost in the beginning, then make sure you mark the anniversary on your calendar and move your money elsewhere when the intro rate expires.

In my case, I prefer to choose an account that still offers a high yield with or without the bonus tacked on.  I also look at savings accounts that have other things going for it -- say, if they are part of an institution that has a great reputation, has a brokerage arm and has other interesting investment products to offer.  EverBank is an online bank which offers accounts with initial interest rate boosts but also offers a great variety of investment products as well.

3. You don't get the stated interest unless you lock up your money for a given term.

An example of such an account is one that only pays out the advertised interest if you deposit your money and don’t touch it for four or five years.  Now there is nothing wrong with this in principle, if you are quite willing to tie up your money for this long.  But you wouldn’t choose this kind of account as your main savings account.  You should only consider it if you've already got a designated account that gives you more liquidity and that perhaps, contains your rainy day money.  If this is the case, you can enjoy getting a better rate of interest on any cash you are willing to tie up for a few years.

4. The account's interest rates change way too frequently.

How stable is that interest rate?  Perhaps you are lured to a savings account because of its interest rate advertisement.  At times, this type of fluctuation may seem to be a positive thing, particularly if rates are going up.  But what if the trend is downward?  If you’re using the rate as your primary reason for choosing an account, you may be disappointed later on when you find that the account’s rate changes quite a bit over time.  So if you’ve pegged your hopes on a particular rate, it may not necessarily last. 

Be Aware of the Hidden Costs

As you can see, there are some good deals to be had on savings accounts, even today when the interest rates are incredibly low.  But you need to be prepared to give up something else in order to get them –-  whether that is access to your cash, a good rate for an extended period of time or something else.

This means that you have to consider all aspects of every account before making your decision on which one is the best savings account for you.  We all want our money to work for us and we want to get the best returns for it that we can.  But sometimes we also need to know where to draw the line.  Otherwise, we could end up getting tied to something that we really don’t need.

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michal

This is a wonderful opinion. The things mentioned are unanimous and needs to be appreciated by everyone.
High Interest Savings Account

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Guest594

I recently opened the type of account mentioned in #2 (Well's Fargo) and it was no secret that the 5% + 5% bonus was just an introductory rate, but after that it goes down to 2% + 2% yearly bonus which still seems unexpectedly good considering the 1.1% rates that are pretty common. I did some research and I could not find anything wrong with this account. How can the banks offer what looks like an actually good deal?

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Charles

I totally agree about reading the fine prints. Oftentimes, they require a minimum monthly balance to receive the advertised rate. If you fall below, they'll not only charge you a fee, but also give you a much lower rate for that month.