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ING Direct was the first to offer a high yield savings account. However, since its offering many years ago, there have been at least a dozen banks to jump into the fray.Today you have banks that are online only, you have large brick & mortar traditional banks offering online accounts, and you even have banks offering two totally different online bank subsidiaries (Emigrant Direct and Dollar Savings Direct are subsidiaries of Emigrant Bank). So, how are you supposed to decide which is the best bank to put your savings?
Here are six steps to picking the right online bank for you:
Step 1: FDIC Insured
I won't put my funds in a bank that isn't FDIC insured. You can confirm that an online bank is FDIC insured by searching for it in the FDIC's Bank Find tool. Only banks in the United States can be FDIC insured, so that Icelandic online bank offering that 10% Certificate of Deposit in Icelandic Króna will never be FDIC insured. International banks with domestic banking subsidiaries, like HSBC, can be insured. If you're unsure, hit up the FDIC Bank Find tool.
Step 2: Interest Rate
A bank can offer all the bells and whistles it wants but the bottom line is the interest rate has to be competitive. The top rate at the moment is Washington Mutual's checking & savings account offering 3.75% APY indefinitely, which means you have to be within striking distance of that rate in order to compete. That leaves you a bank like FNBO Direct (First National Bank of Omaha) and HSBC Direct (Hongkong and Shanghai Banking Corporation) both sitting pretty at 3.50% APY, though HSBC Direct is weaker because they claim to only offer the rate until September.
Step 3: No Fees, No Minimums
There are two criteria that nearly all online banks have - no fees whatsoever and no minimum balance requirements. There are only a few banks that charge fees and only a fee that require a minimum balance, I recommend skipping those banks unless you have an exceptionally compelling reason to put your deposits there. Be sure to check everywhere for fees from transfer fees to annual fees.
Step 4: Brick & Mortar Locations
While not a requirement, having a physical branch nearby is always a nice bonus when it comes to an online bank. Washington Mutual, one of the largest savings and loan banks, has nearly three thousand branches and a broad geographic presence. This isn't a measure of how safe the bank is though, it's merely a matter of convenience.
Step 5: Check Reviews
Whether it's Bankrate's Safe & Sound ratings (an indication of bank solvency) or my opinion of the best high yield savings accounts (an indication of features), check the reviews of any online bank you're thinking about depositing with. Some offer Quicken and MS Money downloads, some offer check-less external account links, and some offer fancy investment tools. By reading all the reviews, you get a better idea of which account is a better fit for you.
Step 6: Test It Out
It costs nothing but your time to open another bank account (most online banks will not pull your credit prior to opening an account) so you might as well just open one. If you're indifferent, a great tiebreaker is whether the bank offers a signup bonus. ING Direct offers a $25 referral bonus for new accounts that deposit $250 (referrer gets $10, so find or make a friend) and Virtual Bank offers $20 to each. Once you've opened an account, play around with it and see how you like it. If you feel comfortable, transfer your funds in. If you don't, no harm in opening it.
Storing some cash in an online savings account is a simple way to really increase the amount you earn in interest. If we're talking about $20 in savings, it's not a big deal but if you have couple thousand sitting around, this is absolutely something to consider.
Jim
