Savings rate-chasing is a strategy in which savers consistently use a tool such as Bankrate or MyBankTracker to determine which savings account is offering the highest interest rate, then regularly move their cash reserves to the highest-yielding account.
For example, if a rate-chaser has $25,000 in savings in Bank A, which offers a rate of 1.9 percent, and sees that Bank B is currently offering 2 percent, he’ll move his savings into Bank B. If a few weeks later, the rate-chaser notes that Bank C is now offering 2.25 percent, he’ll move funds into that new bank. And so on and so on.
For some savers, this strategy may become increasingly tempting as interest rates continue to rise and consumers find that their current banking institution isn’t raising its rates as fast as another.
But does this strategy work? Experts say: not really.
“This is something that we don’t recommend,” says Jason Reposa, CEO and co-founder of MyBankTracker, a resource for consumers making banking and financial decisions. He describes himself as a “reformed rate-chaser” who briefly employed this strategy before recognizing its pitfalls.
While moving your savings from a low-interest account to a more generous one is typically a good move to make infrequently, it’s risky to do it regularly, experts say. “Everybody needs to do it the first time,” says Greg McBride, chief financial analyst at Bankrate.com. “In other words, get your money out of the [account] that pays 0.1 percent and get it in to a savings account that pays 2 percent or so.”
But after you’ve made that initial transition, aim to stay put with your savings, McBride says. “The returns are hard to come by unless the interest rates are moving higher by leaps an bounds, which they are not,” he says.
Here’s one reason to limit your savings rate-chasing: “There are diminishing returns,” McBride says. While the difference of a 0.1 percent return and a 2 percent return on, for example, a $5,000 savings account is sizable, the difference in interest between that $5,000 saved in an account paying 2 percent versus 2.25 percent is much smaller: just $12 in the first year.
Plus, chances are that if your bank is already offering a fairly competitive rate, it will eventually catch up with its peers. “Find a bank that has really competitive rates and stick with them because, as rates go up, all the banks float higher and higher to the top,” Reposa says.
Another quirk that can eat into any interest rate gain results from the fact that switching bank accounts is rarely as easy or as fast as simply pressing the “delete” button on your computer. “Banks are smart,” Reposa says. “They’re not going to let you leave so easily.”
You may have to pay a fee to close your account, lose a sign-up bonus that hasn’t fully vested or deal with a “customer retention” department pressuring you to stay. Plus, there is typically a time lag between when your cash exits the old account and enters the new one. During that limbo period, your funds won’t earn any interest at all, which will eat into any gains you hoped to make by moving your cash. “You could easily have a week of downtime,” McBride says. “The lost interest on a week of downtime is going to take a while to earn back.”
Plus, chances are that if your bank is already offering a fairly competitive rate, it will eventually catch up with its peers. “Find a bank that has really competitive rates and stick with them because, as rates go up, all the banks float higher and higher to the top,” Reposa says.
Another quirk that can eat into any interest rate gain results from the fact that switching bank accounts is rarely as easy or as fast as simply pressing the “delete” button on your computer. “Banks are smart,” Reposa says. “They’re not going to let you leave so easily.”
You may have to pay a fee to close your account, lose a sign-up bonus that hasn’t fully vested or deal with a “customer retention” department pressuring you to stay. Plus, there is typically a time lag between when your cash exits the old account and enters the new one. During that limbo period, your funds won’t earn any interest at all, which will eat into any gains you hoped to make by moving your cash. “You could easily have a week of downtime,” McBride says. “The lost interest on a week of downtime is going to take a while to earn back.”