With rising interest rates, consumers face a Catch-22.
When the Federal Reserve boosts its target funds rate, banks are quick to follow suit by increasing the cost of borrowing on everything from credit cards to home equity lines of credit.
And yet the deposit rate, which is the interest rate banks pay to their account holders, barely budges — the current average interest rate on a savings account is still near rock bottom at only 0.18 percent, according to Bankrate.
“Banks are notorious for dropping rates quickly and raising them slowly,” said Ric Edelman, founder and executive chairman of Edelman Financial Services.
In fact, banks’ terms allow them to be slower to raise rates on savings products than they are on loans.
However, competition among online banks is finally paying off.
“They keep raising rates in an effort to outdo each other,” said Greg McBride, chief financial analyst at Bankrate.com. “You can find significantly higher savings rates by shopping around.”
Currently, top-yielding savings accounts could be as high as 2 percent, according to Bankrate. (Online banks are able to offer higher-yielding accounts online because they come with less overhead expenses than traditional bank accounts.)
“If you’re not keeping pace with inflation, you are losing money.”
All in, depositors now have $11.95 trillion at U.S. commercial banks, close to a record high, according to data from the Federal Reserve Bank of St. Louis.
The average balance among savers is $40,840, according to an estimate by MagnifyMoney based on Federal Reserve consumer finance data.
At 0.18 percent, a $40,000 deposit earns just $72 after one year. At 2 percent, that same $40,000 deposit would earn $800 – a difference of $728.
“If you could get nearly $1,000 a year, that’s real money,” said Nick Clements, co-founder and head of content at MagnifyMoney.com. “You are not going to get rich, but it is not immaterial.”
Furthermore, “if you’re not keeping pace with inflation, you are losing money,” McBride added. “The Federal Reserve is trying to get inflation to 2 percent — that’s the bogey to aim for.”
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You can earn even more with CDs, or certificates of deposit, if you don’t need your money for an extended period of time and you shop around. The national average is still just 0.51 percent but the average on top-yielding CDs is as high as 2.2 percent, according to Bankrate.
(With CDs, you can withdraw the interest at any time throughout the term, but there are penalties for withdrawing the original deposit. To avoid tying up too much cash at once, savers can also “ladder” their CDs, where you deposit money into, a one-, two- and three-year CD, for example.)