Interest rates are skyrocketing. So why is your savings account still paying 0.13%?

Interest rates rise, with the Federal Reserve on Wednesday boost your referral rate for the fifth time this year at a 3.25% target. But Americans hoping to take advantage of a similar hike in savings account rates have been unlucky this year.

Yes, savings account rates have risen, but they are lagging the pace set by the Federal Reserve – as well as increases seen in other interest-based products, such as mortgage rates and card rates. of credit, both of which have increased this year.

Average physical savings accounts paid just 0.13%, according to Bankrate’s September 21 weekly survey of institutions. In comparison, mortgage lenders now charge above 6%a level not seen since 2008, while credit cards charge an average of 21.59% APR for new cards, two percentage points higher than at the start of the year, according to LendingTree.

This creates a painful reality for savers: while rates are higher than nine months ago, banks are offering yields that remain well below highest inflation in four decades. That’s certainly better than the returns seen by stock and bond investors this year — with the S&P 500 down more than 20% year-to-date — but the spread between savings accounts and the Fed’s benchmark rate means savers are further behind.

“The real return, unfortunately, is still negative – in this case it’s negative because the rate of inflation is still so high,” said Ken Tumin, banking expert at DepositAccounts.com. “Eventually, I’m hoping that if the Fed can bring inflation back to more normal levels, you’ll see positive real returns, but now, unfortunately, that’s not the case.”

Banks: plenty of cash

Savings accounts offered lower interest rates ahead of Wednesday’s hike compared to three years ago, when the federal funds rate was at the same level, Tumin said. Savings rates are expected to rise in the coming days, but will likely still lag the Fed’s 0.75 percentage point increase, he added.

For example, the average return on physical savings accounts in February 2019 was 0.2%, compared to an average of 0.13% on September 21.

The reason, Tumin said, comes down to the fact that traditional banks haven’t had to raise rates to attract customers, given the surge in deposits throughout the pandemic. Essentially, banks are full of cash, which they use to fund their loans. Savings jumped during the pandemic as Americans cut travel and entertainment spending amid government shutdowns, while cash injections through stimulus checks and pandemic aid helped bolster their cash cushions.

“A lot of people put the extra savings in banks,” Tumin noted. “Over the past decade, there have been so many years of low rates that many consumers have been conditioned to low rates and may not shop as they once did for higher rates, especially in physical banks where you don’t have a lot of benefits to shop.”

A plus point: online accounts

There is an option for consumers who keep their money in traditional banks and want to maximize their returns: turn to online banking, Tumin said.

“By not maintaining the branch network, it’s a big cost reduction [online banks] can put in higher deposit rates instead of operating branches and staff,” he said.

The average online savings account offered 1.81% in September, according to DepositAccounts.com. Although much better than the 0.13% offered by physical banks, it is still lower than the comparative rate of 2.21% offered by online banks in February 2019.

“But 1.81% is 10 times that of brick and mortar,” Tumin noted. “You have more incentive to transfer your money to online banks.”

How to Shop for a Better Rate

There are many financial sites that compile current rates offered by a range of banks, ranging from DepositAccounts.com at Bankrate.com and nerdwallet.

Tumin recommends keeping your checking account with the bank you currently use, but look for a better savings account rate with an online bank.

Once you have found a new service, you can link your old checking account to the new online savings account, he said. This will make it easier for you to transfer money between accounts, while taking advantage of the higher rate of the online savings account.

But read the fine print and make sure you know what services are offered — or not offered — by online banking, Tumin recommended. Sometimes smaller online banks don’t have the same services or ability to handle complex transitions as larger brick-and-mortar institutions, he noted. For example, some may not be able to manage joint accounts or trust accounts.

“Most of the online banks are raising their rates, maybe not as fast as the Fed, but they have pretty substantial rate increases,” Tumin said. “You will see higher rates than if you keep it in a physical bank.”

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