Online savings accounts: What to look for and what to avoid

Rising interest rates have considerably increased the rate advantage of online savings accounts over brick-and-mortar savings accounts. It’s now, more than ever before, well worth your time to open an online savings account. But before you do, there are a few important factors to consider.

The rapid pace at which the Federal Reserve has increased its benchmark interest rate this year has created an opportunity to earn much more interest on your cash. But that opportunity does not come from most brick-and-mortar banks, which have been increasing their savings account rates at a snail’s pace. 

The nationwide savings account average yield as documented by the FDIC has only increased from 0.06% to 0.24% this year. Online banks, on the other hand, have been increasing their savings account rates much faster. In 2022, the average online savings account yield as tracked by DepositAccounts.com has increased from 0.46% to 3.02%. 

But not all online savings accounts are the surefire interest generator they appear to be. Here’s what to look out for when selecting an online savings account.

Check the account rate history

One thing to look out for is an online savings account with a short history. This is especially important when interest rates are rising. 

Instead of raising the interest rate of one savings account, a few online banks have regularly created new savings accounts with flashy promotional rates to attract new customers but that will end after a couple of months. If a bank’s high-interest savings account has a short history while old savings accounts held by existing customers are kept below competitive rates, that’s a sign the online bank may be using this tactic. Opening an account at this bank may not impact you immediately, but down the road, you may miss out on higher savings account rates. 

Unless the account disclosures contain specific time guarantees, banks are free to adjust rates on checking and savings accounts. Therefore, before opening an account, review its account rate history to ensure it has a record of remaining competitive over multiple years.

Consider money market accounts

Online savings accounts aren’t the only high-yield bank account available: Look for online money market accounts as well. These are essentially the same as a bank savings account but with a different name. 

At online banks, money market accounts often have the same features as savings accounts. However, money market accounts are more likely to require a minimum balance to avoid a monthly service charge and some offer limited check writing capabilities. 

Still, when looking for the highest rates on savings accounts, both money market and savings accounts should be considered.

Seek out banks that offer checking accounts

Even if you don’t have an immediate need for a new checking account, an online bank that offers both a checking and savings account has an advantage over those that just offer a savings account. 

After you become comfortable with the online savings account, you may find that the online bank’s checking account has many benefits over your current checking account. For example, online banks often provide free checking accounts with several perks such as free ATM usage and free checks.

Beware of electronic funds transfer fees

Beware of online banks with websites that are light on account details such as their electronic funds transfer capabilities. This is a critical feature for online banks since electronic funds transfers are often the only way to make deposits and withdrawals. 

Also, some online banks have small limits on the amount of money that can be transferred. A couple of banks even charge fees for transferring money out of the account. Details of the account’s electronic funds transfer capabilities and limitations should be clearly listed on the bank’s website.

By knowing what to look for and look out for, you can find an online savings account that will benefit you over the long run. As interest rates rise, online savings account rates are leaving brick-and-mortar savings account rates in the dust, and that is making it ever more advantageous to open an online savings account.

Ken Tumin is founder of DepositAccounts.com by LendingTree, which has been tracking and rating the savings, CD and checking account offerings of banks and credit unions for more than a decade.