Estás leyendo la prensa de bolsa del futuro | ¿Aún compras prensa escrita para leer sobre Economía?
Find:

Choosing an Account - Interest Paid and Convenience

Published by sam - 23/08/07 - 01:08:30 am

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

Last entry we discussed the factors to consider when choosing an account. We’ve already discussed about Pricing and Actual Cost and several fee structures banks applied. Today we’re going to discuss about factors concerning Interest Paid and convenience.

Interest Paid
To complicate matters, many checking accounts also pay interest.  So your final cost maintaining the account becomes a matter of subtracting fees and charges, then adding back any interest earned.

Many accounts now offer interest rates that may changes periodically in relation to rates n the money markets.  If interest rates in general rise, interest bearing checking account rates may rise.  If rates fall, interest-bearing checking account rates will likely fall.

Bank advertisements almost always claim that their Super NOW accounts pay “market rates”.  Actually, while Super NOW rates bear a relationship to market rates, typically they are below the real market rate.  For example, in summer 1988, Super NOW accounts were paying an average of 5.77 percent interest (before monthly fees, and subject to minimum-balance requirements).  At the same time, the average money market fund yield—which is the true yardstick of “market rates”—was 6.93 percent.

You should not be too concerned about how much higher or lower your particular NOW or Super NOW interest rate is, compared with other bank offerings – unless your rate is unusually low.  Chances are, your bank will not be more than a half point or so higher or lower than other area banks, because they all monitor each other and adjust rates to remain competitive.  A half point rate difference on a $1,000 balance amounts to only $5 per year.

Sometimes, however, one bank will try to attract more customers by offering an exceptionally high rate.  But once the new depositors are signed up the promotional rates fall back more “normal” levels.  The inconvenience of moving money from bank to bank is frequently not worth these temporary gains.

As important as how much interest the bank pays is how the bank pays interest.  As with account fees, there are several methods used by banks to calculate interest earned by a depositor. 

Some methods are better than others.

All balances
Interest is paid on all balances kept in the account.  This is the most advantageous system for depositors.

Minimum balance required
Interest is paid only if you maintain a certain balance level determined by the bank.

Within these two methods are further subsets:
Entire balance. The interest rate is paid based on the entire balance.  If your have $1,000 in the account, your earnings are equal to the annual interest rate times $1000.

Tiered rates (entire balance)  With this method, depositors are rewarded with higher interest rates for keeping higher account balances.  If you keep under $500 in the account, you may be paid 5 percent interest on the entire balance; if you keep $500 to $2,500, you earn 6 percent interest on the entire balance; and if you keep a balance more than $2,500, your interest rate is 6.25 percent.

Blended rates  As with tiered rates, this method pays different interests rates at different balance levels.  However, each rate applies not to the entire account balance  but to “slices” of the balance.   Thus, using the above mentioned tiered rate threshold example, if you have $3,000 on deposit, you will earn 5 percent interest for the year on the first $500 in the account, plus 6 percent annual interest on the next $2,000, plus 6.25 percent annual interest on the last $500.  That totals $176.25 for the year, compounded annually—or $11.25 less than the $187.50 you would have earned with the tiered-rate entire-balance formula of $3,000  x  6.25 percent (compounded annually).  Ask the bank you are considering if it uses a blended-rate formula on its interest-bearing checking accounts.  If the answer is yes, avoid that bank.

Convenience
Most people shop for a bank the way they look for a mailbox.  The nearest one will do.  When one considers the importance of other factors, such as fees and interest rates, choosing a bank on convenience alone can be unwise.  On the other hand, one should not ignore convenience.  It has a real value.

First among these is time.  If you have to travel halfway across town once a week to get to a bank that pays a slightly higher interest rate than the bank down the block, you may end up losing money.  Consider the value of your lost time due to travel, as well as the actual cost of transportation.

Convenience also comes in the form of numerous branches.  Bank of America has hundreds of branches scattered all over California.  If you travel frequently around the Golden State, that easy access to your money can be very convenient.  A bank that offers 24-hour ATM machines, or access to a regional or national ATM network, provides you with similar convenience (see p.13).  This is particularly true in states such as Colorado and Texas, where commercial bank branching is prohibited by law; ATM networks have given these single-office banks hundreds of “branches”.

Artículos relacionados

No Comments »

RSS feed for comments. TrackBack URI

Leave a Comment

XHTML: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <code> <em> <i> <strike> <strong>

Welcome to Personal Money Management Expert,the blog where you can find advices to save money and to earn more with each dollar. If you want, it's possible to suscribe by mail and receive all news by e-mail.

E-mail:

Este blog funciona gracias a WordPress | Condiciones de uso de los contenidos | Responsabilidad
Entradas y Comentarios feeds. XHTML y CSS válidos.