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How to Choose an Online Savings Account
Tip It!I’m a huge fan on online banking. In fact, we opened our first online savings account with ING Direct over five years ago, and we haven’t looked back since.
Sure, we still have a local brick and mortar bank for convenience, but we keep the vast majority of our savings online. Why? Because online banks offer significantly higher interest rates than do their local competitors.
I’ve opened more than my fair share of accounts over the years, in part because I enjoy rate-chasing, and in part because I like reviewing them here on FCN. With that in mind, I wanted to talk a bit about what I look for when evaluating an online bank.
Interest Rates
One of the biggest factors that I consider when evaluating an online bank is their interest rate. While online savings rates can fluctuate dramatically over time (just look at the downward spiral we’ve experienced over the last few months), certain banks are consistently amongst the best (or worst) of breed.
For example, ING Direct is typically amongst the first to lower their rates and the last to raise them when the interest rate landscape changes. Thus, while they’re quite popular, they’re not at the bleeding edge rate-wise.
In contrast, banks like FNBO Direct, DollarSavingsDirect, and Everbank have consistently ranked near the top in terms of interest rates.
Recommended:
» Everbank
» DollarSavingsDirect
» FNBO Direct
Note: If you’re looking for a higher yield than a regular bank can offer, and you don’t mind taking on some additional risk, you might want to check out Lending Club. It’s not FDIC-insured, but annual returns have averaged 9.05% APY over the past 18 months. It’s free to open an account, and you can get started with as little as $25.
Bank Safety
Whenever I evaluate a new bank, I always check out their safety ratings. To be completely honest, I’m not sure why I bother because, as long as they have FDIC insurance, I’m perfectly happy putting my money there.
Case in point… I recently opened an account with DollarSavingsDirect. They have a 1-star Bankrate rating, but I’m still perfectly comfortable having money with them as long as we stay below the FDIC insurance limits.
Aside from bank stability, you also want to find one that is secure. The good news here is that most of the major online banks have fairly similar (and secure) login procedures, etc. Honestly, the biggest thing you can do to ensure the security of your money is to choose a strong password and then avoid falling for a phishing scheme.
Recommended:
» FNBO Direct
» Everbank
» ING Direct
Minimum Balance Requirements
Many online banks don’t have a minimum balance requirement, but some do. Fall below it, and your interest rate will likely tumble, and you might also find yourself subject to monthly fees. If you’re not in a position to keep a large amount of cash in your account on an ongoing basis, then be careful to choose one without a high minimum. WT Direct is an example of a bank with a relatively high balance requirement ($10,000 minimum).
Recommended:
» FNBO Direct
» ING Direct
» HSBC Direct
» E*Trade Bank
Online Interface
I’m not terribly picky when it comes to bank interfaces. As long as the site is secure and functional, I’m pretty happy. That being said, some sites are certainly slicker than others. One of my favorites in this regard is our old standby, ING Direct. They not only have a very clean interface, but they make it dead easy to create subaccounts for different savings goals.
Recommended: (Largely subjective)
» ING Direct
» Everbank
» FNBO Direct
Other Account Types
If you want more than just a savings account, be sure to check what other account types your bank of choice offers, as well as your options for linking them together. For example, ING Direct now offers an online checking account that can be linked directly to your savings account. Taking this a step further, Everbank offers checking, savings, and money market accounts, as well as a wide range of CDs that can be purchased in a variety of currencies.
Another possible consideration is access to a brokerage account. Here again, ING Direct doesn’t disappoint, as you can link your account directly to a Sharebuilder account. Likewise, E*Trade offers both high yield savings accounts and access to their brokerage accounts.
Recommended:
» ING Direct
» Everbank
» E*Trade Bank
Customer Service
Customer service is sort of a funny thing when it comes to online banking. If all goes well, you’ll never need to interact with a real, live person. But if something goes wrong, you’ll likely want to get someone on the line. While many banks have 24 hour customer service lines, some don’t. If this is important to you, then be sure to check it out (and maybe call to test their hold times) before selecting a bank.
Another factor that I’ll lump in here with customer service is the time it takes to transfer money in and out of the bank. Some banks are quite good at this (e.g., ING Direct), consistently completing your transactions in two days, whereas others (e.g., HSBC Direct) drag their feet a bit and take a full three days. Not a huge deal, but something to consider if you’ll be shuffling money around on a regular basis.
Recommended: (Based on personal experience)
» ING Direct
» FNBO Direct
» DollarSavingsDirect
ATM Access
This one has never really been an issue for us, as we keep enough money in our local bank to avoid needing regular ATM access to our savings. Nonetheless, it’s an important consideration for some customers. Beyond asking whether or not your bank of choice offers an ATM card, you also need to consider fees. Some, such as ING Direct (via a linked Electric Orange account), offer free ATM access via specific networks (Allpoint in the case of ING) whereas others do not. FNBO Direct likewise offers free access to a specific ATM network (Circle One), and both E-Trade and Everbank reimburses you for up to $6 in ATM fees each month (that’s roughly three transactions)
Recommended:
» ING Direct
» FNBO Direct
» E*Trade
» Everbank
Closing Thoughts
As with most consumer decisions, selecting the best online savings account is all about tradeoffs and finding a happy medium. What’s more important to you, interest rates or safety ratings? Online interface or minimum balance requirements? For us, the top two options are FNBO Direct and DollarSavingsDirect. The former excels in nearly every aspect, whereas the latter outperforms in terms of interest rate, but lags a bit in other areas.
Published on February 11th, 2009 - 15 Comments
Filed under: Banking
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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February 11th, 2009 at 7:31 am
Do you find the other advantages at ING worth the reduced rate? I am considering opening an ING account but it isn’t at the top of the rate game. I like the idea being able to do subaccounts and haven’t heard of any other bank offering that option.
February 11th, 2009 at 10:01 am
What suggestions do you have for those like us, with ‘limited’ savings and a history at one bank? Realistically, because of our balance, switching from ING to FNBO would net us only a four dollar increase – is it worth it to rate chase?
February 11th, 2009 at 11:41 am
Suburban, we use a strategy that might work for you. We keep subaccounts at ING for things like “entertainment” or “dogs”, which will have lower balances usually and we will access more. We then keep our “emergency” savings at DollarSavingsDirect, which will eventually have a much higher balance (once we are able to save up enough). This provides the flexibility of ING for things we use more often and the higher rate of DSD for our emergency savings, which will hopefully just sit and earn interest.
I’m in the process of adding a second “linked” account at DSD using snail mail, so we’ll see how that goes…
February 11th, 2009 at 11:47 am
Jeff: No, I wouldn’t chase rates under those circumstances.
February 11th, 2009 at 11:48 am
I use ING with subaccounts and FNBO Direct for savings. Not only because FNBO has a higher rate, but the couple day delay between transfers lets you forget about the money in there and leave it alone.
Can’t beat the ING Electric Orange. Sends paper checks for you? Totally Awesome. I’d really appreciate a more user friendly interface though. Like being able to forecast your balance out based on set transfers. Overall its a little clunky but it does EVERYTHING.
The lower rate doesn’t come that much into play with lesser amounts in there.
February 11th, 2009 at 1:30 pm
It wasn’t mentioned in the article, but one of the nice convenience factors of ING is its integration with Sharebuilder Online Stock Brokerage Account. ING bought Sharebuilder a few years ago and you can link your Savings and Brokerage accounts together. So, if you want to make a stock purchase, or transfer the money you made on a sale to your savings…you can make these transfers instantly. No waiting a day or two for the transaction to go through.
I guess this benefit all matters on whether you already have a brokerage account that you like. Sharebuilder from my experience is not bad. If you’re in the boat of wanting to open a brokerage account and have ING or are looking for an online savings account..then its worth checking out.
February 11th, 2009 at 1:53 pm
brad: Good point. E*Trade bank is likewise integrated with their brokerage account. I’ll try to add this in somewhere.
February 11th, 2009 at 2:17 pm
I am doing research and planning on setting up my first online bank. I have read a lot of good testimonials from both ING and FNBO Direct. Is there any losing situation by picking one over the other?
February 11th, 2009 at 8:01 pm
A question for you online banking pro’s out there —
I have accounts with ING Direct and Emigrant Direct. Based on this article, I opened one at DollarSavingsDirect because the interest rate there is higher with DSD than the others (by at least 1% for ING, and nearly that for Emigrant Direct).
Here’s the thing – I try not to have too many online accounts linked to my brick and mortar checking account. So, I’ve been linking one online savings account to another one, and using one account as the ‘funding source’ for another.
Every online bank seems to ask for a b&m checking account for funding, but I just put in the routing and account info for my online savings, and it seems to work fine.
Am I asking for trouble by linking a bunch of online savings accounts together when the banks clearly ask for a b&m checking account?
Thanks in advance for your input.
February 11th, 2009 at 11:08 pm
@PR
The main thing you need to watch out for is to make sure you do not exceed the transfer limit on your savings account, by law I think you can’t transfer out more than 6 times a month or something like that so moving money through the savings accounts to each other could get you into trouble.
February 12th, 2009 at 12:07 am
Unless you are operating in the 10’s of thousands range, rate hoping may not be worth it. Back when regular banks were offering 3% and online rates were in the 6%+ range, it was a practical goldmine. Rates have really dropped lately, so getting even 1/2 a point higher doesn’t have as much value. Security, service, and convenience are what to look for now.
February 12th, 2009 at 9:12 am
GAH!! DollarSavingsDirect just dropped their rate AGAIN . . . this time to 3.05%.
I moved all but the minimum balance for DSD into my rewards checking at 5.01%, hooray!
-Mike J
February 13th, 2009 at 6:56 pm
I’ve enjoyed using ING for the past year, but also feel frustrated watching our savings rate dwindle. I hate to move after a year to another bank, but might consider another option if rates continue to fall. BTW, have you noticed rates falling for HELOC? Our line of credit is at 3.25% Unbelievable.
February 19th, 2009 at 12:34 am
Don’t forget about GMAC Bank. Now with a 4-star rating, an actual “bank” status, and soon (this year) to get a name-change ridding itself of the GM affiliation.
GMAC currently offers two no-minimum accounts: online savings, with a 2.75% APY, and money market, with a 2.25% APY. The money market comes with checks and a debit card (and they refund a limited amount of ATM fees). Customer service has always been good, online banking interface is simple and clean, and transfers are FAST (often next-day).
My only complaint: no electronic statements option. It would only SAVE them money, but oh well.
February 23rd, 2009 at 3:16 pm
I have and Orange Savings Account w/ING. They do NOT offer ATM access. You have to get the lower interest checking account (Electric Orange) for that. Also, ING has drop there rates several times in the last few months. They’re giving me 1.85% now. I’m getting out.