Savings Account

When you’re shopping around for a new savings account or a certificate of deposit, chances are that you’re looking for a competitive interest rate. But have you ever wondered just how the financial institution decides what rates to offer?

The truth of it is, there are several factors that influence the interest rates on deposit accounts. The first factor is the financial product itself. For example, savings accounts and money market accounts typically offer lower interest rates than a CD. This largely has to do with the level of access you have to your money. With savings and money market accounts you can typically make a certain number of withdrawals without penalty, while a CD requires you to leave your money with the bank for a specified period of time. Generally, the longer the term of your CD, the higher the interest rate you’ll receive. Think of it like this – the bank rewards you for leaving your money with them for a set amount of time. The longer you agree to leave the money there, the more likely you are to receive an attractive rate.

Of course, interest rates will vary by financial institution. Many online-only banks offer higher interest rates on their deposit accounts than their brick-and-mortar counterparts because they have less overhead costs to deal with. Because they’re not paying money to maintain and staff physical branches, they can pass that cost-savings along to their customers in the way of more competitive interest rates. Likewise, many brick-and-mortar banks offer “online-only” accounts with more attractive interest rates than their regular deposit products. The customer is expected to handle their banking needs online (and in some cases they’ll even be charged a fee if they need to visit a branch), and in return they receive a higher interest rate on their account.

Another factor in how banks determine the interest rates for savings products is supply and demand. The money that customers deposit into their bank accounts is the same money that the financial institution lends out to borrowers, who pay interest on the loans. So, if the demand for loans increases, and the bank needs more deposits from which to lend, they may be inclined to increase the interest rates on their deposit accounts to make them more attractive to savers like you. On the flip side, a decreased demand for loans could result in lower interest rates on savings accounts, because the bank doesn’t need as many deposits to keep up with lending demands.

It’s also typical for banks to base their deposit account rates on “benchmark” interest rates. The federal funds rate is the rate that financial institutions charge each other for extremely short-term loans. This federal funds rate is a common benchmark for the interest rates that banks offer their customers. In other words, if the federal funds rate changes, banks will typically adjust the rates they’re offering customers on savings products like savings accounts and CDs.

Investor demand for U.S. Treasury bonds and notes is another factor, as is the Federal Reserve, which sets the federal funds rate. The Federal Reserve (often referred to simply as “the Fed”) frequently makes announcements and decisions about how monetary policy will impact rates.

The Fed influences these rates by buying or selling previously issued U.S. securities. When it buys more securities, banks end up with more money than they can use for lending, and the interest rates decrease. And when the Fed sells securities, money from the banks is tapped, resulting in fewer funds available for lending. This, in turn, forces a hike in interest rates.

Knowing which factors affect the interest rates on deposit accounts can help you to make a more informed decision when you’re shopping around for a savings product. And don’t forget to review and factor in any fees or maintenance charges associated with the account before you open it – those can take a real bite out of your earned interest if you’re not careful!

So you’re looking to stash some money away for a rainy day…or maybe a sunny vacation stay. But you’re not sure which is a better choice – a savings account or a certificate of deposit (CD).

Obviously both are designed with savings in mind. And both will earn you interest. But there are some significant differences to consider.

A savings account is an interest-bearing deposit account that you can set up at a bank or another financial institution. Depending on the institution, you may be limited on the number of withdrawals you can make from the account each month. Plus, fees may be charged if you don’t maintain a certain average monthly balance in the account.

A savings account usually can be opened with an initial deposit of just a few dollars. Subsequent deposits can be made for any amount and at any time.

A certificate of deposit is a product that’s set up for a specific amount of time, such as one year, two years, or five years. It’s available through banks, credit unions, and thrift institutions. A minimum deposit is required no matter what time frame is chosen. At Bank5 Connect, the minimum is $500.

CDs are similar to savings accounts in that they are virtually risk free. For banks, CDs are insured by the Federal Deposit Insurance Corporation (FDIC). For credit unions, insurance is provided by the National Credit Union Administration (NCUA).

All Bank5 Connect CDs have FDIC insurance for up to $250,000, plus CDs are insured for over $250,000 by the Depositors Insurance Fund (DIF).

What makes CDs different from savings accounts is that they usually have a fixed interest rate and a specific, fixed term. The latter is intended to have the customer hold onto the CD until it reaches its maturity, at which time the money invested can be withdrawn, along with accrued interest.

CDs are known for offering a competitive interest rate compared to savings accounts. And, unlike savings accounts, a typical CD is established with a lump sum deposit.

Usually, a customer will receive a higher interest rate if they have a larger principal to invest and they choose a longer term for the CD. However, penalties are typically assessed for early withdrawals.

Bank5 Connect CDs have terms of 6, 12, 18, 24, and 36 months, and there are no monthly maintenance fees.