If interest rates are rising, why isn’t my bank account earning more?

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With all the talk of rising interest rates, it’s natural for consumers to assume that the rates on their bank accounts are headed up too.

 

To fight record inflation, the Federal Reserve (the Fed) has raised the federal funds target rate — a key borrowing rate — four times this year, to a current 2.25% to 2.5% and is expected to do so again in the Fall. This comes after years of the near zero or zero rate levels.

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Higher rates result in consumers paying more for mortgages, credit cards, auto loans, home equity lines of credit, and other loans. The Fed rates also affect how much interest is earned on savings accounts, certificates of deposit (CDs), and other accounts. Thus, the silver lining to rising rates would seem to be that the interest on your bank accounts would finally rise above near zero levels.

 

Unfortunately, that’s not always what happens.

 

While some banks and financial institutions have raised interest rates on savings, many have not. One reason is simply that it takes longer for some banks to respond to rising interest rates than others. Another issue is that, due to high levels of pandemic saving, many institutions aren’t looking to woo new customers (and more deposits) with attractive interest rates.

 

Here’s a closer look at why your bank account may not be earning the interest you think it should.

 

Related: Overdraft vs. NSF fees

How Fed Rates Affect Banks

When you hear that the Fed has raised (or lowered) interest rates, it is referring to the federal funds rate, which is the target interest rate at which banks borrow and lend money to one another. This has a ripple effect across the entire economy.

 

When interest rates rise, loans become more expensive for banks and, in turn, consumers and businesses. However, it can also mean higher yields for savers. That’s because, when you have a savings account at a bank, you are effectively letting the bank borrow your money, and the institution pays you interest in return.

 

In a higher-rate environment, banks may start raising the annual percentage yield (APY) on savings accounts and rewards checking accounts to attract new customers. However, that’s not always how it works, at least not right away.

 

Recommended: What Is a Good Interest Rate for a Savings Account?

How Banking Lending and Borrowing Works

When you — and all bank customers — make a deposit to your checking or savings account, your bank uses that money to make higher interest loans, such as personal loans, car loans, and mortgages. That’s a chief way banks make money.

 

With people saving more during the pandemic, banks have seen their deposits skyrocket. The result, at least for the short term, is that many institutions don’t need to attract checking and savings customers with competitive interest rates because they already have plenty of cash on hand to use for lending.

 

Also, when banks pay interest on customers’ savings accounts in a low-rate environment, which has been the case for many years, they may pay more than what they make when they lend to other banks. The result is that some banks have to slash profits to keep paying interest to savers or even go into the red. Now that rates are rising, some of these institutions are holding back on increasing APYs to help make up for those lost profits.

Some Banks Lag Behind the Fed Longer than Others

It may be that your bank will raise rates on your savings or checking account soon. They just haven’t done it in sync with the Fed’s announcements.

 

Typically, online savings accounts respond more quickly to Fed rate changes. This is because there is generally a lot more competition among online banks for customers (and their deposits). APYs offered by traditional brick-and-mortar banks often react much more slowly to Fed rate increases, and yields hardly ever rise as high as the Fed’s interest rate.

 

What’s important to remember is that banks don’t increase rates at the same time or at the same rate as the Fed. It’s a good idea to keep an eye on both your savings and your credit accounts to see what moves your bank is making.

A Note About Brick-and-Mortar Banks

Big banks with lots of physical locations generally have higher operating expenses than online banks and, as a result, may be reluctant to offer higher rates that cut into profits.

 

But that’s only part of the story, says Brian Walsh, senior manager of financial planning at SoFi. Big banks know their customers often experience inertia when it comes to changing banks. “They may have started their account in college or when they were setting up direct deposit at their first job. Those customers tend to just stick around,” he explains. As a result, big banks may determine they won’t lose customers if they don’t raise rates, so they are less likely to do so.

Customers Often Overestimate How Difficult it is to Change Banks

Often banking customers are reluctant to switch because they overestimate the amount of time or paperwork it will take,” says Walsh. They may feel a slightly higher interest rate just isn’t worth the trouble. According to SoFi research from February 2021, a third of 1,600 respondents said they see no benefit to switching their bank or financial institution.

 

Walsh acknowledges that there is some time involved in changing banks, but notes that the hour or two you spend will likely pay off over time. “The difference between close to zero percent interest on your savings account and 1.80% can add up to a lot of money,” he says.

The Takeaway

Even if the Fed is raising rates, banks and other financial institutions don’t necessarily follow, at least not immediately. They may decide it doesn’t fit into their business and profit strategies to raise rates on customer accounts. They may also be counting on the fact that banking customers often experience inertia when it comes to switching to a higher paying bank, especially if they have been using an established institution for a long period of time.

 

Understanding why your bank account interest rates don’t move in tandem with the Fed’s actions can help determine if you should make a change. If you’re not satisfied with the interest you’re currently earning on your accounts, you may want to consider an online bank account.

 

Learn More:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

 

 

SoFi Checking and Savings is offered through SoFi Bank, N.A. 2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found here


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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What rising interest rates mean for student borrowers

 

With retail interest rates set for another bump following the Federal Reserve’s expected half-point hike this week, student loans are coming into even sharper focus. The historic low interest rates of recent years may soon become a thing of the past. The question is: How soon?

 

Related: Quiz: Should I refinance my student loans?

 

simonapilolla / istockphoto

 

To battle inflation, the Fed raised interest rates in March by 0.25%, the first rate increase since 2018. At the time, economists said the Fed could raise interest rates another six times, aiming for a rate of 1.9% by the end of the year.

 

It’s been described as the most aggressive pace in 15 years, but the Fed may be turning up the heat even more, increasing the next bump to 50 basis points. Fed Chair Jerome Powell said ahead of the May 3-4 meeting, that the half point hike would be on the table, as “it is appropriate to be moving a little more quickly” to fight inflation.

 

Powell added that investors who are anticipating a series of half-point increases were not over-reacting, indicating that by the end of the year, the Fed rate could be even higher than 1.9%.

 

CasPhotography/istock

 

It’s this low-interest environment that has made student loan refinancing a money-saving move. When loan holders refinanced, they were often able to secure a lower interest rate than the rate on their federal loans. (For example, the federal student loan rate for undergraduate Direct Subsidized loans was 6.8% from July 2006 through June 2008, while refinancing rates were sub-3% as recently as last year.)

 

Rates are off their lows now, but still not as high as they were in 2006. But with the Fed raising its rates faster than indicated earlier this year, the window for refinancing student loans at a comparatively low rate may be closing a lot sooner than anticipated.

 

Recommended: Student Loan Refinancing Calculator

 

Damir Khabirov / istockphoto

 

Of course, if you have federal student loans, you know that the current interest rate is 0% and is scheduled to stay that way through Aug. 31. No doubt, that’s a rate that can’t be beat.

 

However, if you are waiting for the payment pause to end before refinancing your federal student loans, you may find yourself looking at much higher interest rates by fall. Depending on what your current interest rate is and how much you have borrowed, you could see bigger savings by not waiting.

 

tommaso79/ iStock

 

And if you are thinking of refinancing private student loans, you may not want to delay at all, since rates are unlikely to go lower right now.

 

That said, federal student loan borrowers should keep in mind that refinancing means you are replacing your federal loan with a private one, and as a result, you will no longer be eligible for federal repayment or forgiveness programs or other protections.

 

Recommended: Top 5 Tips for Refinancing Student Loans in 2022

 

 

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A series of expected increases from an inflation-fighting Federal Reserve means that the interest rates on student loan refinancing are rising – and possibly rising fast. Since getting the lowest possible interest rate is the goal for refinancing, it may not pay to delay any longer.

 

Learn More:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

 

SoFi Student Loan Refinance

IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS, PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE  FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

 

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