Smart Shoppers Can Take Advantage of Rates

Tips on making sure your bank is paying you as much as possible.

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Today's guest post comes from Richard Barrington, spokesman for MoneyRates, where he writes a blog on developments involving deposit interest rates.

Savers and investors who are burned out on speculation and investment scams might be understandably cynical about the phrase "a sure thing." However, there is a sure way smart investment shoppers can earn something extra on their bank deposits, without taking extra risk.

Here's the catch: it won't make you rich overnight. Still, if there's one lesson to take away from the succession of busts in dot.coms, housing, and hedge funds, it's that get-rich-quick schemes are always designed to get somebody else rich. In contrast, a secure retirement is built step-by-step.

The first step is this: don't leave money on the table. That may sound obvious, but chances are you have a bank account or CD that is paying you a less-than-optimal interest rate. In fact, due to some unusual conditions, differences among interest rates are especially high right now. That's where the sure thing comes in--making sure you benefit from those differences rather than suffer from them.

Market Conditions Have Sharpened Differences in Rates

 Why are there such sharp differences in interest rates from one bank product to the next? A couple prominent reasons:

  • 1-month to 6-month CD spreads are especially steep. According to Federal Reserve data, the difference in annualized interest between a 1-month and a 6-month CD is more than a full percentage point. Normally, that spread is about a quarter of a point. Chances are, moving out to a slightly longer-term CD wouldn't hamper your cash flow needs very much, but on a maximum FDIC-insured deposit, it could be worth about $2,500 per year.
    • Conditions vary greatly from bank to bank. That same Federal Reserve data puts the average 6-month CD rate at 1.42%. At the same time, finding the best 6-month CD rates could earn you another percentage point on top of that. There are many reasons for this. Because of turmoil in the financial markets, banks have very different concerns and resources right now. Some are hurting and pulling in their horns, while others are still able to actively attract investors by offering more competitive interest rates.
    • The point is, you can get an extra percentage point just by moving out a few months in CD duration. You can get another full point by shopping around among banks. On the maximum FDIC-insured deposit, you'd now be up to an additional $5,000 per year.

      Bank Shopping in the Internet Age

      Of course, you may not be accustomed to shopping around for banking products. Traditionally, people tended to find one bank and stick with it--either a comfortable household name, or a local community bank. However, recent conditions have shaken up much of the complacency regarding those traditional choices:

      • Big household name banks are prominent among those listed as the most troubled, due to their far-flung, risky lines of business.
        • Your local community bank may be exposed to many of the same regional economic risks that you are--if your area suffers job losses and housing price declines, a local bank could run into trouble at the same time you do.
        • Internet resources have made it easy for smart shoppers to expand on these traditional banking choices. Using those resources can help you find a sure thing in the form of some extra interest on banking products. Sure, it's a small step, but won't it be refreshing to see your finances take any step in the right direction?