The Fed Raised Rates Again. Here’s Why It Pays to Move to an Online Bank

Happy couple reviewing their bank accounts on a laptop and on paper at a desk

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It’s a move that could work to your advantage in a very big way.

Key points

  • Online banks tend to pay higher interest rates on savings than physical banks.
  • With interest rates going up, now’s a good time to move over to an online bank.

In June, the Federal Reserve raised its benchmark interest rate by 0.75%, signifying the largest rate hike in decades. In July, the same thing happened again.

The reason the Fed is raising rates to such an extreme is that it wants to slow the pace of inflation. Consumers have been grappling with sky-high living costs since the start of the year. And many are racking up scores of debt on their credit cards just to cover their essential bills, like gas, utilities, and groceries.

Inflation has been rampant because supply chains have slowed in the wake of the pandemic, so there’s been a mismatch between supply and demand. By raising interest rates, the Fed is hoping to make borrowing expensive enough that it prompts consumers to cut back on spending to a modest degree. That should narrow the gap between supply and demand and, in turn, help bring soaring inflation to an end.

Now on the one hand, interest rate hikes are bad news for consumers because they can make borrowing a lot more expensive, whether in the form of a credit card balance or a different type of loan. The upside, however, is that they can also lead to more generous interest rates in savings accounts.

Such has been the case over the past number of weeks. A lot of banks have increased the amount of interest they’re paying on savings accounts as well as certificates of deposit. But if you want to take full advantage of higher interest rates, it could pay to move your money over to an online bank.

Why banking online really pays off

Physical banks take a lot of money to operate. You have to staff them, pay rent, and keep the lights on, among other things.

Online banks need to pay employees, too. But they don’t have to bear the cost of operating physical branches. As such, online banks tend to pass those savings over to consumers in the form of higher interest rates on their savings accounts. And with interest rates rising due to actions on the part of the Federal Reserve, now’s a good time to consider a switch to an online bank.

Of course, this doesn’t mean you should necessarily move all of your money over to an online bank. If you have a checking account at a physical bank, you may want to hang onto it. That way, you get access to different services, including ATMs when you need a physical cash withdrawal. But when it comes to your savings, you could end up making a lot more money by banking online.

Will interest rates continue to rise?

In July, the rate of inflation slowed a bit compared to June, but that number was still very high. As such, the Fed is likely to keep moving forward with interest rate hikes (though perhaps not to the same extreme degree as in June and July). That could lead to even higher savings account interest rates, which is all the more reason to consider a switch to an online bank right now.

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Read More: The Fed Raised Rates Again. Here’s Why It Pays to Move to an Online Bank

2022-08-12 09:25:37

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