When you\u2019re shopping around to find a good home for your cash, you might see some very high APYs (annual percentage yields) advertised. At first, this probably seems like a good thing. However, if you dig into the fine print for some of these accounts, you\u2019ll notice that the advertised rate can actually have all kinds of strings attached to it, and that the base APY isn\u2019t necessarily competitive. These strings generally are a way for banks to trade one source of revenue for another so they can make more money from you in other ways if they agree to pay you a lot of interest. And unfortunately, banks are often not transparent about those requirements up front.<\/p>\n\n\n\n
At Wealthfront, we value transparency. That means we never hide the details of a promotion in the fine print, and a high base APY, paid by program banks, is available to everyone, no strings attached. <\/p>\n\n\n\n
In this post, we\u2019ll explain some of the ways banks and other financial institutions avoid paying you a high APY. Hopefully, this information will help you spot these tactics more easily and make an informed decision about where to keep your cash. At a high level, our guidance is this: Even if you take advantage of a promotion, make sure to keep your cash somewhere with the features you need and a base APY you\u2019re happy with. <\/strong>Don\u2019t base your decision solely on promotions.<\/p>\n\n\n\n In general, banks like getting your direct deposit. Getting your paycheck is a predictable source of deposits (on which your bank can make money) on a regular schedule, and it signals to your bank that you\u2019re probably treating the account as your primary account. For that reason, banks will sometimes require you to set up direct deposit (potentially of a minimum size) in order to get a high APY. Make sure you\u2019re happy with the base APY and the account features if you decide to do this\u2014don\u2019t get distracted by the promotion.<\/p>\n\n\n\n Earning more interest is powerful \u2014 it compounds<\/a> over time and can help you reach your financial goals faster. Unfortunately, some institutions limit the amount of deposits they\u2019ll pay you a high interest rate on to ensure you don\u2019t earn so much interest that it has a powerful impact on their<\/em> bottom line. These limits can be surprisingly low \u2014 we found a bank with a limit of just $10,000. It\u2019s wise to keep your funds at an institution that will pay you a high base APY on all of your deposits, not just some of them.<\/p>\n\n\n\n While some banks limit the amount of money on which you can earn interest, others will require you to hold large minimum balances with them just to get their advertised APY. These requirements can be prohibitively high, and might even force you to hold more cash than you otherwise would (which can be a bad thing for your long-term wealth). For example, we found a bank that requires a $25,000 minimum balance in order to earn interest in their account.<\/p>\n\n\n\n Debit card interchange (or the fees banks earn from debit card transactions) are another way for banks to make money. As a result, some banks will agree to pay you a high interest rate (effectively decreasing the amount they earn on your deposits) as long as they know they\u2019ll earn a certain amount of interchange from your debit charge transactions. For example, one bank requires you to spend $1,000 a month on their debit card to get their preferred APY. While you won\u2019t pay interchange fees directly, the requirement does mean you\u2019ll have to miss out on credit card loyalty points just to hit the minimum debit card spend to get a good APY.<\/p>\n\n\n\n Sometimes banks will ask you to pay a subscription fee to access a high APY. In other words, if you pay them more, they\u2019ll pay you more. These fees can cost a significant amount \u2014 in some cases, as much as $125 a year. But before you fork over a hefty subscription fee, you should check to make sure you\u2019ll actually earn enough in extra interest over the course of the year to justify it. Unless your account balance is very large or the interest rate is much, much higher than what you\u2019d get elsewhere, it\u2019s unlikely you\u2019ll come out ahead. An online calculator like this one from Nerdwallet<\/a> can help with the math.<\/p>\n\n\n\n At a high level, banks can earn more money from you in two ways: they can get you to deposit more money into an account you already have with them, or they can get you to use additional accounts, products, and services they offer. For example, some banks will pay you a high APY if you take out a loan from them (and in order to take out this loan, you might need to have a cash balance of a certain size, which arguably defeats the purpose of the loan). They do this because you\u2019ll owe the bank interest on that loan, which means you\u2019ll likely pay your bank more than they pay you on your deposits, meaning the bank still comes out ahead. <\/p>\n\n\n\n As the name \u201cteaser rate\u201d suggests, banks will sometimes lure you into opening an account or depositing more money with a temporarily high APY for a limited amount of time. You might see the promotional rate advertised prominently and then have to dig into the fine print to learn how long it\u2019ll actually be available (often just a few months) before dropping significantly. Unfortunately, once that offer expires, you typically go back to earning a lower, less competitive APY. Banks are willing to do this because they hope you\u2019ll stick with them when the APY goes down again, which means the bank will go back to keeping more of what they earn on your deposits instead of sharing it with you. It\u2019s important to make sure you\u2019re happy with the bank\u2019s base rate, not just their teaser rate.<\/p>\n\n\n\n If you see an interest rate with an asterisk next to it, that\u2019s often a good indicator that something unseemly is afoot. Keep in mind that the examples in this post are not exhaustive. We encourage you to keep your short-term savings at an institution you trust to pay you a competitive base APY over time without a bunch of cumbersome requirements. <\/p>\n\n\n\n Wealthfront has a documented history<\/a> of paying a high base APY to all of our clients and passing along the vast majority of each federal funds rate increase since the Cash Account\u2019s<\/a> inception. We plan to keep doing exactly that, whether or not you use our other products or spend a certain amount on our debit card. In addition to a high APY (currently 3.30%), our Cash Account also offers: <\/p>\n\n\n\nDirect deposit requirement<\/h2>\n\n\n\n
Maximum balance limits<\/h2>\n\n\n\n
Minimum balance limits<\/h2>\n\n\n\n
Required minimum debit card transactions<\/h2>\n\n\n\n
Paid subscription<\/h2>\n\n\n\n
Loan requirements<\/h2>\n\n\n\n
Teaser rates<\/h2>\n\n\n\n
Beware the asterisk<\/h2>\n\n\n\n
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