Large banks provide vast ATM networks, advanced technology, and a wide array of products. But when it comes to interest rates on savings accounts, they’re often overshadowed by small banks and credit unions.
While some local institutions and internet banks recently offered rates of 5 percent or more on savings accounts and money market deposit accounts, interest rates on some large banks’ accounts have barely budged since the Federal Reserve Board started hiking short-term rates in March 2022.
A 2023 research paper published by the UCLA Anderson School of Management concluded that customers of large banks are willing to accept low rates on their savings in exchange for other benefits large banks provide. Small banks are compelled to offer higher rates on deposits to stay competitive, the economists found. The economists also concluded that customers of small banks are more price-sensitive than large-bank customers, who typically have higher incomes and live in urban areas. Small banks and credit unions tend to charge lower fees for monthly account maintenance and overdrafts, too.
Large banks have also benefited from inertia, says Ken Tumin, founder of DepositAccounts.com. Many customers of large banks don’t pay attention to what they’re earning on their savings after they open an account, providing little incentive for banks to raise rates, he says.
If you’re looking for a higher yield on your savings, check out accounts from internet banks, which offer many of the best deals. These institutions can offer extremely competitive rates because they don’t have to spend money on brick-and-mortar branches.
If the Fed cuts rates later this year, institutions of all sizes will lower their rates. Look for rates on high-yield online accounts to fall first, Tumin says. Some online banks have already reduced rates on certificates of deposit in anticipation of a Fed rate cut.
Fortunately, there’s no need to pledge fidelity to one bank or credit union. You may choose, for example, to locate your checking account at a small bank or credit union that doesn’t charge a monthly fee and invest your emergency savings in a high-yield online savings account.
Generally, interest rates on credit cards from small and medium-size banks and credit unions are lower than rates on cards issued by large financial institutions, even for borrowers with good credit, according to a recent analysis by the Consumer Financial Protection Bureau (CFPB). For example, the median interest rate for people with good credit was 28.20 percent for large credit card issuers compared with 18.15 percent for small issuers, the CFPB found.
While that’s a significant difference, carrying a balance on a credit card with an 18 percent interest rate is no bargain, says Ted Rossman, senior analyst for CreditCards.com. Instead of hunting for a low-rate credit card, Rossman says, endeavor to pay off your card’s balance every month so that you avoid interest altogether.
Consumers who don’t carry a balance can come out ahead with the numerous perks that rewards credit cards from big banks offer, such as frequent-flier miles and cash back on a variety of purchases.
