Photo: Flickr / andriux-uk
When the Federal Reserve pushed interest rates higher in the late 1970s to bring down inflation, angry farmers drove their tractors to Washington, D.C., and blockaded the Fed’s headquarters.The Fed’s current stance on interest rates has just as many detractors, but most of them are too old, weary or poor to board a bus for the nation’s capital. The Fed reiterated last month that it intends to keep rates near zero through 2014.
This policy, aimed at boosting the struggling economy, has been a boon for borrowers, but savers have suffered. Interest rates on most bank accounts, certificates of deposit and other low-risk investments aren’t even keeping up with inflation.
One way around that is to take more risk, but many seniors are unwilling to take chances with their retirement savings. Similarly, investors who are building an emergency fund or saving for a short-term goal need a safe, easily accessible place for their money.
There is a glimmer of good news for savers. Some financial institutions, in an effort to attract customers, are offering above-average rates. Barclays Bank (barclaysus.com/deposits) announced Monday that it’s offering U.S. investors an online savings account with an interest rate of 1percent. There’s no minimum balance or monthly maintenance fee, says Steve Carp, managing director of deposits for Barclays US.
Barclays is also offering CDs with rates ranging from 0.9percent for a one-year CD to 1.75percent for a five-year CD. While that’s far less than the 4percent to 5percent rates investors could earn a few years ago, the average one-year CD is paying just 0.33percent, and the average five-year rate is 1.13percent, according to Bankrate.com’s weekly interest rate survey.
U.K.-based Barclays has no retail bank branches in the U.S., so the only way to invest in these new products is through an online account. Customers will be able to transfer funds to their regular checking accounts, Carp says. Investors can link their Barclays account to up to three other bank accounts, Carp says.
Barclays is betting that the higher rates will attract a wide swatch of savers, not just those who are young and tech-savvy. Nearly 60 per cent of savers say they would open or switch to an online-only account if it offered consistently higher rates, according to a Harris Interactive survey. “We see across the demographic spectrum that people are comfortable with online banking,” Carp says.
Barclays isn’t the only financial institution offering higher rates to savers willing to bank online, TIAA-Cref Direct (tiaa-cref.org/banking) has quietly launched an online savings account that pays 1.25percent with no minimum balance. The account was initially limited to TIAA-Cref employees and their families but was recently made available to all consumers.
In March, CIT Bank, (cit.com/citsavings), which provides loans to small and midsize businesses, launched an online savings account with a rate of 0.85percent and no minimum balance. CIT Bank also offers CDs with rates ranging from 1.06percent for a one-year CD to 1.42percent for a three-year CD.
Rates for high-yield savings accounts could change at any time, and it may not be worth opening an account if you don’t have much to invest, says Ken Tumin, founder of DepositAccounts.com. But if you have a large account, switching to an online bank with a higher rate will put a little more money in your pocket.
Other low-risk ways to earn a higher rate:
– Rewards checking accounts. These accounts, typically offered by small banks and credit unions, offer rates of 2percent or more, but to earn them, you must meet certain criteria. Typically, you have to make at least 10 debit card purchases a month. If you fail to meet these conditions, your rate will shrivel. Another drawback is that they limit the amount of eligible for the rewards rate, Tumin says. The caps range from $10,000 to $25,000.
– I Bonds. The interest rate for I Bonds issued from May 2012 through October 2012 is 2.2percent. I Bonds have two components: a fixed rate that remains the same for the life of the bond, and an inflation rate that’s adjusted every six months. This batch of I Bonds has a fixed rate of 0percent, which means you’ll never earn more than the rate of inflation. Also, you can’t withdraw your money for a year, and you’ll pay a penalty if you redeem your bonds within the first five years after purchase. For more information, go to TreasuryDirect.gov.