For the seventh time in about two years, the Federal Reserve has raised the federal funds rate. That’s good news for savers: These rate hikes are one of several factors that can prompt banks and credit unions to increase the rates they pay on savings accounts.
So how high will savings rates climb in 2018? Some experts see them hitting 2%. That’s 25 times the current national average.
That makes this year an excellent time to revisit the way you bank to take advantage of rising interest 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 0.08%, according to the Federal Deposit Insurance Corp.
With a savings rate, or annual percentage yield, of 0.08%, a $5,000 deposit earns $4 after one year. A 1.65% APY, which can be had at a number of trustworthy online banks, would earn a little over $83 — 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,” Kristina Yee said in a March interview.
“Their operations are just leaner,” said the then-senior analyst at financial services research firm Aite Group.
And although Fed rate hikes aren’t directly tied to savings account rates, they are one of several factors that could encourage banks and credit unions to increase APYs.
Diane Morais, president of consumer and commercial bank products at Ally Bank, an online-only institution, says Ally looks at several factors when mulling a rate change.
“Rates being offered by competitors are often a key factor,” she 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. But it’s smart to consider your options.
Keep an eye out for high rates
This year, experts expect a total of four 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.
by Goldman Sachs
at American Express