Online Savings Accounts — Is Rate All That Matters?
Last month, a friend of mine was looking to move her savings, and I immediately recommended that she choose an online high-yield savings account — specifically ING Direct. Besides offering a competitive 3.0% interest rate and a $25 sign-up bonus, ING Direct also has a very intuitive, easy to use system. Seemed like a smart choice for my friend.
However, a few days later, my friend came back to me, telling me that a third mutual friend had told her that ING was not the best choice, as HSBC offered a higher interest rate, and that she should go with them. So is the interest rate the only factor to consider when opening an online savings account?
Major Online Savings Accounts
The online savings account landscape has changed dramatically over the past couple of years, and there are now numerous major players:
- A Rate Leader: HSBC Direct – http://www.hsbcdirect.com/ – offering 3.50% APY as a promotional rate.
- A Rate Leader: FNBO Direct – http://www.fnbodirect.com/ – offering 3.50% APY
- E*Trade - http://www.etrade.com/ – offering 3.30% APY
- ING Direct – http://www.ingdirect.com/ – offering 3.00% APY
- Emigrant Direct – http://www.emigrantdirect.com/ – offering 3.00% APY
* Note that these interest rates are current as of the date of this posting — these rates are almost certain to change with time!
In addition to that list of major online-only banks, many large national banks are also offering competing high-yield savings accounts, such as Citibank with the Ultimate Savings Account, although most of the accounts offered by these major national banks are not nearly as attractive as those offered by the online-=only banks listed above.
Does anything besides interest rate matter?
You might be wondering — how on earth do you pick which online savings account to go with? That is a fair question. The Savings Toolbox recently took a look at how to compare online savings accounts, suggesting you look at interest rates, amount limitations, customer service, fees, transfer limitations, ATM card access, and new account bonuses. All are definitely important things to consider, but unfortunately most of those banks I mentioned have similar fees, limitations, and more – so while you can use those factors to weed out the bad seeds, you’re likely going to find yourself with a small list of the online banks which appear largely equal except for interest rate.
Bank stability has never been very important to me. This is a hot topic right now with recent bank collapses, and there are certainly websites (like Bankrate.com) that evaluate the health of a bank. However, given that all of these accounts are FDIC insured up to limits that I come nowhere close to reaching, I rest easy. Even if my bank failed, I would only be away from my money for a day or two at most — not a big deal.
So what can you use to compare them, besides interest rates? Customer service is important, but most banks have decent customer service, and a quick search on the internet will usually identify any banks with customer service problems. Besides, you are unlikely to need to interact with customer service that often; usually, the only time I find myself calling my bank concerns fees, and most online savings accounts are largely fee-free. Given the very simple tasks that need to go with an online savings account, and that most of these accounts are associated with very reputable banks, I am not too concerned about customer service.
Personally, I think website functionality is probably the only other differentiating factor at which you can look. Some are more intuitive than others (ING Direct), while some are deceptively simple (FNBO), and some offer some pretty unique features (such as subaccounts at ING Direct — more on this later). While it is true that you are unlikely to need to interact much with your online savings accounts, minor differences in how responsive or how many clicks are necessary to perform a task can make a difference.
So go with the interest rate?
All things considered, though, interest rate should probably be a key deciding factor when you open an online savings account, if only because there is so little else to differentiate. A lot of other bloggers try to evaluate minor details of online banks, but a lot of these points often seem trivial. If one of the online banks has a feature or interface that speaks to you, you should go with what is most comfortable. Otherwise, I would follow the money. For example, many other bloggers argue that ING Direct’s simple interface and ability to open sub accounts makes it worth choosing over the slightly-higher-interest competitors. If that is a compelling argument to you, ING Direct might make sense despite its slightly lower interest rate.
The beautiful thing about online savings accounts, though, is that there is only a marginal opportunity cost to opening them (and virtually no monetary cost) – usually no minimum balances, no fees, etc. So if you do not like the bank account you go with, it usually is not a big deal to open up a new one somewhere else.
Why I Recommended ING Direct
If ING Direct has a rate that is 0.50% lower than HSBC Direct, why then did I recommend ING? First of all, I truly believe that ING has a very intuitive and friendly attitude that makes opening, using, and maintaining an online savings account easy and fun. For someone who is very comfortable banking online and moving money around, I might not recommend ING Direct. But for those who are uncomfortable or who have concerns, ING is great — there is a reason so many people applaud ING Direct on the internet.
Furthermore, to refute my friend’s interest argument, I pointed out that if you only have $1,000 in your savings account, it would take five years for the added interest from HSBC to surpass the $25 sign-up bonus at ING direct. Let’s be honest, the difference between 3.0% APY and 3.50% APY is just not that great.
That being said, it does not seem worth spending too much time trying to decide between ING Direct, Emigrant Direct, E*Trade, HSBC Direct, FNBO Direct, etc. — they are, on some level, all very similar with very similar interest rates. I spent a lot of time trying to figure out which one was best for me, when in reality any of them would have sufficed.
How did you choose your savings account? What is important to you?
Subscribe to Student Scrooge
Badges
Saw your article in the Carnival. I posted a link to your article as well.