Rate Chasing Seems Harmless Enough, but It Can Quickly Become Perilous

For much of 2012 and 2013, a little known online bank offered an outstanding online savings rate that was well above that offered by the other major online banks. The bank, New York Community Bank (NYCB), operates two online banking brands, Amtrust Direct and MyBankingDirect.com. I, like many followers of BestCashCow, opened an account with Amtrust during this time and received an interest rate on my savings for more than a year from this bank several basis points above that which I would have received anywhere else.

In September 2013, however, the rate fell abruptly without notice of any sort to customers and all of the sudden depositors in NYCB brands were earning less in their online savings accounts than in accounts at more familiar names like American Express, CIT or GE Capital. This underscores the first peril of chasing rates: rates on savings accounts can always fall dramatically and without notice.

A second peril came to light when I tried to redeploy money from NYCB to a bank with higher rates. NYCB’s limitations on numbers of transfers and amounts of money that could be transferred out within a single timeframe made the process of winding down take two months for those who had deposited close to $250,000, the FDIC insured maximum on bank deposits.

To be clear, the bank’s abrupt rate change (during a period where their competitors were actually raising rates as bond yields were rising) and its obstacles to withdrawals were frustrating, but they were well within the bank’s rights. And, they were necessary and understandable risks that I and many others took to earn a higher savings rate over the period.

The third peril, however, was not one that I expected to encounter in the chase for the best savings rates. It arose when I stopped short of closing my account after withdrawing almost all of my balance with the bank. I thought I was being clever by leaving a couple of dollars in my account so that I would be able easily to move money back were they to raise the rate again. Two months later, however, I received a strongly worded note from NYCB stating that they had just instituted a $10 monthly account service fee, resulting in my account having a negative balance. The letter further stated that the negative balance, if not paid immediately, would result in a closure of my account and the bank reporting “information about your account to credit bureaus, such as Chexsystems” so that “defaults on your account may be reflected in your credit report”.

I was able to resolve this issue with the bank by phone, closing the account and avoiding any damage to my credit rating. Nonetheless, this experience underscores another and perilous pitfall in rate chasing.

You can, however, mitigate these perils. First, you must follow savings and money market rates closely, checking online with those banks where you have accounts and as well as checking with BestCashCow often to be sure rates have not changed. Second, you may want to avoid banks that do not allow you to move the balances out quickly (major banks do not impose undue obstacles, but some smaller banks do have monthly limits). Third, you should always be sure to close an account fully and immediately after you have received your final month’s interest in order to avoid a situation like the one I found myself in.

A Note on FDIC coverage: Some banks, such as NYCB, operate online banks under multiple online brands. BestCashCow.com follows an editorial policy of listing only one online brand associated with a single FDIC certificate. This policy avoids confusion and prevents depositors from unintentionally exceeding FDIC limits. Since both the Amtrust Direct and MyBankingDirect brands are covered under NYCB’s FDIC certificate, this site is only listed as Amtrust Direct in our rate tables.