After years of raising interest rates to combat high inflation, the Federal Reserve recently began lowering the federal funds rate.
While this is good news for borrowers, eager savers may not be as appreciative. With savings account interest rates falling in response to a lower federal funds rate, those who’ve been enjoying high returns on their savings may be tempted to switch banks to secure the best rates they can find.
While “rate chasing” may seem like a good strategy to get the most bang for your buck, it has some disadvantages you should be aware of. Read more to find out when it’s worth switching banks.
Is rate chasing worth it?
Savings interest rates vary by bank and can change at any time, often in response to the federal funds rate. Rate chasing involves constantly searching for the best savings account rates, opening a new account when you find a better rate, and transferring your savings to your new account.
Often, this pattern of opening and closing bank accounts to eke out a few more basis points isn’t worth it. While there’s a chance it’ll help you earn a few extra bucks, it takes a lot of time and effort that may be better spent elsewhere. However, there are certain situations where switching banks to chase a higher rate may be worth it.
When switching banks is worth it
Switching banks to earn a much higher interest rate — for example, switching from a large brick-and-mortar bank to an online bank offering a high-yield savings account — is often worth the effort.
Some major banks — like Chase, for example — tend to offer rock-bottom savings account interest rates, often around 0.01% APY. Meanwhile, it’s possible to find high-yield savings accounts offering rates of at least 4.00% APY.
If you aren’t currently using a high-yield bank account, making the switch from a national bank to a financial institution with more competitive rates can make a major difference in terms of your interest earnings.
The following table illustrates how much interest you’d earn with a $10,000 balance in a savings account earning 0.01% APY, 4.00% APY, and 4.20% APY (with interest compounding daily).
In this case, switching banks to earn 4.00% APY would amount to a difference of more than $400 over the course of a year. But as you can see, jumping from a rate of 4.00% APY to 4.20% APY would only result in an extra $20.
In other words, if you’re already using a high-yield savings account that generally offers a competitive rate, it’s likely not worth switching banks to find a marginally better interest rate.
Plus, savings account interest rates change all the time. A bank that has historically offered a competitive rate will likely continue to do so in the future, even if it doesn’t currently offer the best rate on the market.
Finally, the administrative hassle of moving your money from bank to bank may have financial costs too. Some banks charge account closure fees of up to $50 for closing a bank account within a certain period of time, such as three or six months of account opening. Such a fee could easily eat up any gains in interest earnings.
How to decide if it’s time to switch bank accounts
Ultimately, it’s up to you to decide whether or not it’s worth switching bank accounts, but the following tips can help.
Do the math: Calculate how much money you’d earn with a new account compared to your current account. If it’s a minor difference, you may decide the administrative effort isn’t worth it.
Consider any sign-up bonuses: Sometimes, banks offer cash sign-up bonuses when you open a new account. While not necessarily a reason to open a new account, a sign-up bonus can sweeten the deal if you decide to switch for other reasons. (See a list of the best new bank account sign-up bonuses here.)
Consider fees: Some savings accounts have monthly maintenance fees and some charge early account closure fees. Consider whether an account switch would mean paying these fees, and if so, calculate how much they’d take away from earned interest. On the other hand, switching from an account with a monthly fee to a fee-free account can further boost your earnings.
Weigh account features: Sometimes, it’s worth switching accounts to get the benefits you want and need. For example, if the ability to split up savings between multiple goals is important to you, switching to an account with this perk may be worth it, even if the difference in interest rate is negligible.