There are tricks banks use to pay less interest on your savings. Jackie Pearson looks at the top five interest rate tricks and how can you get around them.
December 1, 2009
Not all saving accounts are equal. When it comes to how they calculate and pay interest, it’s definitely worth checking the terms and conditions before you open a new savings account.
There are several techniques and structures that some banks use, particularly on more traditional savings accounts that can result in you earning less interest than you’d like to. Here are the top five interest rate tricks to look out for.
- Layer by layer
Traditional savings accounts have layered interest rates. They usually start with a base rate and then you can earn bonus interest if you adhere to the terms and conditions that come with the account. You may only be entitled to earn the higher bonus interest rate if you deposit a certain amount each month and make no withdrawals for instance. Another variation is that you have to maintain a minimum balance in the account before you’re entitled to any bonus interest.
For example, BankWest’s Solid Gold Saver is a cash management style account with a competitive rate. However, for each withdrawal you make in a month that rate is reduced by a whole 1 percent. Make four withdrawals in a month and you’d earn no interest.
- Limited time only
Although online savings accounts pay higher interest and have fewer terms and conditions than most other types of deposit accounts, there are still tricks used to limit your ability to earn maximum interest.
The main trick is the handsome introductory interest rate that only lasts for a limited time period and then reverts to a much lower rate.
- Threshold too high
Some traditional savings accounts and cash management accounts only pay a worthwhile rate of interest once your balance climbs, and stays, above a very high level. If your balance falls below that level you can find yourself earning very little, if any interest.
- Interest versus features
One reason to bother with a cash management-style account is that it will usually have more features than an online account. This trade-off between features and interest is another trick employed by the banks to keep your money out of the accounts likely to earn you the highest rate of interest.
If you want branch access, for example, you will have a much more difficult time finding an attractive interest rate than if you’re happy to do all of your transacting over the phone or internet.
- Sneaky fees
The other trade-off savers are often forced to make is between fees, features and interest. The more service you want, the higher the fees you’ll pay and the lower the interest you will earn. Your bank would argue that this is a “user pays” approach that enables them to keep their expenses under control but if you’re serious about getting your savings account balance as high as possible you may have to be prepared to trade off features and service.