Is It Worth It to Switch Accounts for a Higher Interest Rate?
Depending on the accounts you have, you may be able to earn interest and grow your hard-earned money. But interest rates are not created equal and can vary significantly from one account to another.
If you find an account with a higher interest rate than the one you currently have, you might wonder whether it makes sense to switch.
Why Switch Accounts?
When banks and other financial institutions set their savings rates, they consider a number of factors, including the Federal Funds Rate and their operating costs.
At the end of the day, their goal is to satisfy their customers while still earning a profit.
Since traditional banks have a lot of overhead costs that enable them to operate brick-and-mortar branches, like rent, utilities, employee payroll, and insurance, they tend to offer lower interest rates.
Online banks, on the other hand, are known for higher interest rates because they have dramatically lower costs.
If you’re currently using a traditional brick-and-mortar bank, you might be missing out on the higher rates online banks are offering on the same types of accounts you have.
By switching, you may grow your funds at a higher rate and enjoy extra money with minimal effort.
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Switching Savings Accounts
The goal of savings accounts is to help you meet your savings goals with interest. As you explore savings account options, you’ll notice that interest rates are not the same.
In general, interest rates on savings accounts in traditional brick-and-mortar institutions are lower than those at online banks.
Traditional banks have higher overhead costs than online banks so their interest rates are lower.
If you have a savings account at a traditional bank, you might want to explore alternative options at online banks.
You’ll likely find an account with a higher interest rate, which can result in hundreds or even thousands of extra dollars.
If you don’t have a lot of money in your current savings account, you may want to build it up before you switch as many higher yield savings accounts require you to keep a minimum balance.
Pros of Switching Savings Accounts
- Can Earn More Interest: If your current savings account doesn’t pay a good interest rate, you can switch to one with a better rate.
- Access to Perks: Depending on the savings account you choose, you may enjoy extra benefits like ATM cards and automatic savings transfers.
Cons of Switching Savings Accounts
- Might Require a Higher Balance: Some higher yield savings accounts will charge you a fee if you don’t maintain a high balance.
- May Not Have Access to Physical Branches: If you choose a savings account with a higher interest rate at an online bank, you’ll likely need to manage your account online or via an app on your phone.
Switching Checking Accounts
Unlike savings accounts, many checking accounts don’t earn any interest.
The good news is interest bearing checking accounts do exist. Just like traditional checking accounts, interest bearing checking accounts let you make everyday transactions and unlimited withdrawals. You can also use them to write checks and pay bills.
The only major difference between traditional checking accounts and interest-bearing checking accounts, however, is that you might have to maintain a higher balance to avoid a monthly fee.
This may or may not be an issue depending on how much money you typically keep in your checking account.
Pros of Switching Checking Accounts
- Can Earn Interest: If your current checking account doesn’t pay interest, you may switch to an interest-bearing account and make the most of your money.
- Potential Bonus: Some interest-bearing checking accounts offer cash bonuses you may be able to take advantage of as a new customer.
Cons of Switching Checking Accounts
- Potential Higher Balance Requirement: To earn interest and avoid fees, you may have to keep more money in your account.
- May Have to Switch Direct Deposits and Automatic Payments: You’ll need to make sure any direct deposits and automatic payments you currently have set up go through your new account.
Switching Savings Accounts
The goal of savings accounts is to help you meet your savings goals with interest. As you explore savings account options, you’ll notice that interest rates are not the same.
In general, interest rates on savings accounts in traditional brick-and-mortar institutions are lower than those at online banks.
Traditional banks have higher overhead costs than online banks so their interest rates are lower.
If you have a savings account at a traditional bank, you might want to explore alternative options at online banks.
You’ll likely find an account with a higher interest rate, which can result in hundreds or even thousands of extra dollars.
If you don’t have a lot of money in your current savings account, you may want to build it up before you switch as many higher yield savings accounts require you to keep a minimum balance.
Pros of Switching Savings Accounts
- Can Earn More Interest: If your current savings account doesn’t pay a good interest rate, you can switch to one with a better rate.
- Access to Perks: Depending on the savings account you choose, you may enjoy extra benefits like ATM cards and automatic savings transfers.
Cons of Switching Savings Accounts
- Might Require a Higher Balance: Some higher yield savings accounts will charge you a fee if you don’t maintain a high balance.
- May Not Have Access to Physical Branches: If you choose a savings account with a higher interest rate at an online bank, you’ll likely need to manage your account online or via an app on your phone.
Switching CD Accounts
Typically, Certificates of Deposit or CDs come with fixed interest rates and fixed withdrawal dates. These accounts are considered safe investments with a guaranteed return.
Plus, they usually earn higher interest rates than most checking and savings accounts. In most cases, you won’t be able to withdraw funds from your CD before its withdrawal date without paying an early withdrawal penalty.
That’s why it’s important to put a lot of thought into how long you can afford to invest your money.
If you’re saving for a new car or vacation, for example, a shorter term CD between six months to a year is likely your best bet. But if you’d like to use your CD to supplement your retirement account, a longer-term CD is the better option.
Since your goal should be to find a CD with the best interest rate, you’ll need to shop around and compare your options.
If you have a current CD, you can still keep it and open another one. You won’t necessarily have to switch accounts.
Pros of Switching CD Accounts
- May Lock in a Higher Rate: You might be able to find a CD with a higher interest rate than the one you currently have.
- Chance to Try a Different CD: There are many types of CDs you can open, such as bump-up CDs, step-up CDs, no penalty CDs, and callable CDs.
Cons of Switching CD Accounts
- Can Be Difficult to Choose a CD: Since there are countless financial institutions that offer CDs and various CD types, it may be a challenge to find the best fit for your unique situation.
- May Reduce Liquid Cash Available to You: If you opt for a CD that charges an early withdrawal penalty, you’ll want to keep your cash in it until the term is up but you’ll also lower the amount of liquid funds at your disposal.
When Does It Make Sense to Switch Accounts?
If you’re not satisfied with your current account or financial institution, it may be time to take the plunge and switch.
A switch might mean a higher interest rate, additional perks, or even better customer service.
Whether or not you should switch is personal and dependent on your particular goals and preferences.
Fortunately, if you do decide to make the move, the process should be fairly simple as many financial institutions let you open accounts quickly online, from the comfort of your own home or office.
How to Shop Around to Find Rates That Make It Worth Changing
Before you go ahead and switch accounts, make sure the interest rates they offer make the process worthwhile.
Consider how much money you typically keep in an account, the rate you currently have, and how much extra you’d earn in interest if you did switch.
If the additional interest earnings make the switch worthwhile, you’ll want to move forward.
Bottom Line
Sometimes, a new account with a higher interest rate can make it easier for you to meet your financial goals. If you do the math and determine that a higher APY is worth transferring your funds for, don’t be afraid to take action.
