Gazing through the Sunday Paper, your eye catches a dazzling headline written in oversized fire engine red font. The advertisement reads, “Our 4.00% savings rate is among the highest rate in the nation.” Instantly dollar signs pop into your head as you envision beating the stock market with just a bank account.
But if you don’t investigate further before opening the account, you may be in for a surprise when you get your first statement. That’s because in the banking business, not all dollars are created equal.
Some banks will use what is called a tiered interest rate structure when calculating how much interest to pay. What this means is that the amount of interest you receive on your deposit depends on how much money you have in the account. But as you will see later in this article, more money isn’t necessarily better.
Let’s take a look at how tiered interest rate structures work. Your bank balance is split into distinct levels, or tiers. Each tier can be assigned its own interest rate.
The following is an example of a tier structure:
Balances from $0 to $999 earn 1.20%
Balances from $1,000 to $49,999 earn 2.20%
Balances of $50,000 and over earn 4.00%.
Notice that in the above tier structure, even though you are opening an account that is advertised as paying a high rate, you may not actually qualify to receive it.
For instance, a bank may pay you that 4.00% only on balances above $49,999. But if you only plan on depositing less than $50,000 you will receive a rate of only 2.20% or less. Now 2.20% isn’t bad, but it’s not a juicy 4.00%.
Sometimes, the interest rate tier can work in the favor of the small depositor. Instead of offering higher rates for larger balances, some banks will do the opposite. For example, their interest rate tier may be 4.00% on balance of $0 to $20,000 and then $2.20% for balances above $20,000.
That kind of tier may be a way for banks to offer a huge rate while limiting their obligations.
Whatever reason banks have for this type of tier structure, it’s great for people who don’t have a lot of money to invest anyway, so getting a higher rate for a lower balance suits them just fine. However, people with a lot of cash to stash may feel a little cheated.
Here is a tier that’s very common that you need to look out for – 0.00% for balances under $2,000 and 4.00% for the remaining balance. It can be quite a disappointment when you get your monthly statement and see that you earned 0% because your balance fell below $2,000. If you tend to draw down balances frequently or keep low balances, this type of tier structure may not be for you.
So the next time you see eye-popping savings rates advertised in the local paper, do a little investigative research before you commit to the new account. In some cases, you will find that the rate is nothing but bait, but with any luck, you might find a perfect match for your money.
Jon Galanty is a financial writer for eMoneyCentral.com. Visit