Gazing through the Sunday Paper, your eye catches a dazzling
headline written in oversized fire engine red font. The
advertisement reads, "Our 4.00% savings rate is among the
highest rate in the nation." Instantly dollar signs pop into
your head as you envision beating the stock market with just a
bank account.
But if you don't investigate further before opening the account,
you may be in for a surprise when you get your first statement.
That's because in the banking business, not all dollars are
created equal.
Some banks will use what is called a tiered interest rate
structure when calculating how much interest to pay. What this
means is that the amount of interest you receive on your deposit
depends on how much money you have in the account. But as you
will see later in this article, more money isn't necessarily
better.
Let's take a look at how tiered interest rate structures work.
Your bank balance is split into distinct levels, or tiers. Each
tier can be assigned its own interest rate.
The following is an example of a tier structure:
Balances from $0 to $999 earn 1.20% Balances from $1,000 to
$49,999 earn 2.20% Balances of $50,000 and over earn 4.00%.
Notice that in the above tier structure, even though you are
opening an account that is advertised as paying a high rate, you
may not actually qualify to receive it.
For instance, a bank may pay you that 4.00% only on balances
above $49,999. But if you only plan on depositing less than
$50,000 you will receive a rate of only 2.20% or less. Now 2.20%
isn't bad, but it's not a juicy 4.00%.
Sometimes, the interest rate tier can work in the favor of the
small depositor. Instead of offering higher rates for larger
balances, some banks will do the opposite. For example, their
interest rate tier may be 4.00% on balance of $0 to $20,000 and
then $2.20% for balances above $20,000.
That kind of tier may be a way for banks to offer a huge rate
while limiting their obligations.
Whatever reason banks have for this type of tier structure, it's
great for people who don't have a lot of money to invest anyway,
so getting a higher rate for a lower balance suits them just
fine. However, people with a lot of cash to stash may feel a
little cheated.
Here is a tier that's very common that you need to look out for
-- 0.00% for balances under $2,000 and 4.00% for the remaining
balance. It can be quite a disappointment when you get your
monthly statement and see that you earned 0% because your
balance fell below $2,000. If you tend to draw down balances
frequently or keep low balances, this type of tier structure may
not be for you.
So the next time you see eye-popping savings rates advertised in
the local paper, do a little investigative research before you
commit to the new account. In some cases, you will find that the
rate is nothing but bait, but with any luck, you might find a
perfect match for your money.
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