6 Alternatives to Low-Rate Savings Accounts

Paying off debt, prepaid credit cards, and other options for getting the most out of your money.

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Low interest rates are great for borrowers, but lousy for savers. Whether you need a place to stash your emergency fund or a down payment for a home, finding a low-risk option that pays more than about 1 percent is a real challenge today. Recently, a supposedly high-yield savings account I looked into paid a miserly 0.45 percent. On $10,000 invested for a year, 0.45 percent yields just $45 in simple interest.

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Fortunately, there are some good alternatives to traditional savings accounts. As always, you’ll need to assess the risk and terms of each option, not just its return. But if you are looking to invest some cash that earns more than one percent, here are six options to consider.

1. Pay down debt: Paying down debt is a great alternative to low-interest savings accounts. It’s a guaranteed return on your investment, and the lower debt may even increase your credit score. If you have a revolving line of credit, such as a home equity line, you can always take the money back out if you need it later.

2. Long-term CD: Long-term certificates of deposit generally offer higher rates than demand deposit accounts. The reason is you have to lock your money away for the term of the CD. Withdrawal your cash early, and you get hit with an early withdrawal penalty equal to several months of interest. The key is to find a long-term CD that has a relatively small early withdrawal penalty. Surprisingly, some of the best CD rates on long-term CDs have early withdrawal penalties as small as two months worth of interest. With interest rates over 2.5 percent, the risk of a penalty may still make the CD a better option over a savings account paying less than 1 percent.

3. Prepaid credit cards: If you know anything about prepaid credit cards, your first question is why it’s on a list of savings account alternatives. The reason is that some prepaid cards offer linked FDIC-insured savings accounts that pay really attractive interest rates. The Mango MasterCard, for example, offers an FDIC-insured savings account that pays an eye-popping 5.1 percent. Netspend prepaid cards offer a similar savings option. There are limits. The Mango card, for example, limits deposits to $5,000. Still, it’s a great place to stash an emergency fund at a rate that is more than five times the national average for traditional savings accounts.

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4. Savings account hybrids: Recently, companies have begun tying savings goals to FDIC-insured savings accounts. Smarty Pig, for example, is an online savings account in which you set savings goals and then save toward the goal. Friends and family can help you reach the goal, which makes it an ideal option for children saving for college. And it currently pays 1.75percent interest. While this rate won’t prompt dancing in the streets, it beats just about every traditional savings account available.

5. P2P (Peer-to-Peer) Lending: P2P lending is the riskiest savings account alternative listed here. With P2P lending sites such as Prosper and Lending Club, you can lend money directly to individuals looking for loans on everything from debt consolidation to a car loan. Your investment is not FDIC-insured, but return rates can average over 9 percent. And there are ways to reduce your risk, like only lending money to those borrowers with the highest credit score. But there’s still risk in P2P investing. Of course, the returns can also outpace a savings account by a wide margin.

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6. Online Savings Accounts: While savings accounts at many big brick-and-mortar banks offer rates well below 1 percent, you can find much better rates with an online savings account. The best rates today fall in a range of about 1.25 percent to 1.50 percent. As with other alternatives, these rates are still really low by historical measures. But they are two to three times more than you are likely to find at a traditional bank.

DR is the founder of the popular personal finance blog, the Dough Roller and credit card review site, Credit Card Offers IQ.