The Federal Reserve raised its interest rate twice in 2022 and said more hikes are likely. These changes are intended to bring inflation down to manageable levels, but they’re also having an impact on other areas of the economy — with mortgage and credit card rates rising and the stock market moving the other way.
The good news for consumers is that interest rates on savings accounts typically rise when the Fed raises rates, which means more money in their pockets. If interest rates rise, 4 in 5 American consumers plan to take action, according to a new NerdWallet online survey conducted in April 2022 by The Harris Poll. Popular actions they plan include putting more money into their savings account and switching banks when they find a good interest rate.
Maybe you’re ready to move, too. Put yourself in a position to do it smart by doing these five things.
1. Be patient
Currently Top interest rates on savings accounts are better than this January’s rates, but not in the same range as mortgage rate hikes. Why? A commonly cited reason is that banks already have more than $18 trillion in deposits, according to the Federal Reserve, up nearly 30% from March 2020. Since higher interest rates would likely encourage even more deposits, there is none strong incentive for banks to raise interest rates quickly. While the pace is slow, expect interest rates on most savings accounts to continue to rise as interest rates rise overall.
2. Understand your options
There are many types of savings accounts. High-yield savings accounts typically have better interest rates than traditional savings accounts, although a common trade-off is that they have limited or no brick-and-mortar locations.
You may also see good rates on money market accounts or when you buy a certificate of deposit or CD. However, if you need to access your funds frequently, these may not be a good fit.
3. Do your research
First, look at all the tariffs that are offered in your area and online. Find out more about the interest rate before opening a new account. Monthly fees, high account minimums, or fine print that reveals a sign-up bonus to be too good to be true are reasons to pump the brakes.
Finally, compare each new tariff with your current tariff. For example, a 1% interest rate is great if your current interest rate is 0.05%. However, if your interest rate is already 0.8%, the benefits may not outweigh the hassle of switching. For example, if your account balance is $2,500, a 0.25% higher interest rate results in an additional $7 per year.
4. Plan your cash needs
Online-only banks often have good interest rates, but depositing and withdrawing cash can be difficult. If you deposit or withdraw cash frequently, the higher rate may not be worth it.
If it still makes sense to switch, you need a plan. One option is to deposit cash into another checking or savings account at a bank that offers personal services and transfer it to the savings account with higher interest rates.
For withdrawals, you can return funds to the account that has personal services. Or you could use an ATM. In this case, make sure that neither your bank nor the ATM will charge you any fees. Fees from a single transaction could wipe out the equivalent of months of interest.
5. Get rid of other debts
It’s a tempting idea to let your money make even more money just by sitting in an account. But deleveraging can make a big difference greater impact on your overall finances than finding a savings account with a higher interest rate. Before researching interest rates, first create a plan to reduce credit card debt or pay off or refinance student loans.