What I Consider When Selecting an Online Savings Account

Henry at Binary Dollar is hosting this week’s Money Question and what is being asked is

What Do You Look For In An Online Bank Account?

As I have revealed in my previous post, I have a total of five online bank accounts: ING Direct, Virtual Bank, Emigrant Direct, HSBC, and IGoBanking. Except ING Direct, which was my first online bank that I have been using since early 2003, all other four were opened in the past two years. The reason I have so many bank accounts was at one time they all offered very competitive rate. In fact, I have only one reason to use an online savings account: rate! Therefore, when selecting an account, the first thing I look is interest rate. It doesn’t have to be the highest, but should be higher enough as compared to the rates from my existing banks to justify the switch. In addition to interest rates, there are a couple of items I will look as well:

  1. FDIC insured: I won’t use any bank without FDIC insurance, no matter how high the rate is. A savings account should guarantee the safety of the principal. If there’s a risk of losing money, then I think I will be better off putting the money in the stock market instead of a savings account.
  2. Support ACH fund transfer: If the only way to fund the account is by sending a check, then it’s not worth the effort to get an account even if it offers a higher rate. The loss of interests when the check was on the road could offset the gain from the rate.
  3. No fee and low minimum requirement: Once the rate at the bank becomes unfavorable, I should be able to move my money out without having to maintain a high minimum to avoid fees. Though I can close the account, I’d like to have to option of keeping it open in case things change in the positive way later. I usually don’t open an account if the minimum is more than $1,000.

One more thing to consider is the transfer-out limit. If the account has a cap on monthly transfer-out, then it could be a concern if the cap is low. For example, I have an account with IGoBanking (and here’s how I decided to choose IGoBanking last time) which currently pays 5.30% APY. However, the bank only allows a maximum of $20,000 outflow every month. If all the sudden I need more than $20,000, I will have to wait the maximum of 30 days before I can get all the money out. This scenario is unlikely, but not impossible. Therefore, I don’t keep all my cash with IGoBanking, though their rate is the highest among others I use.

Because of the simple use of online savings account, I really don’t care too much whether the bank has user-friendly, easy to navigate interface, offers extra security features, reimburse ATM fees, offers check writing ability, or provides good customer service. These are nice to have, but not essential. I just want to deposit my money quickly, earn interests, and get out (or leave a small amount in the account) without penalty.

Following is a list of some popular online savings accounts, their rates, and minimum balance requirement.

Bank APY Minimum
Citi e-Savings 4.50% $1
Umbrella Bank Money Market 5.50% $1,000
AmTrust Direct e-Money Market 5.36% $1,000
UFB Direct Money Market Savings 5.31% $1
GMAC Bank Money Market Savings 5.30% $500
ING Direct Orange Savings 4.50% $1
E-Loan Online Savings 5.25% $5,000
Emigrant Direct American Dream Savings 5.05% $1
HSBC Online Savings 5.05% $1
IGoBanking Savings 5.30% $1
Costco Capital One Money Market 5.00% $5,000

A little known FNBO Direct bank is now offering a promotion rate of 6.00% APY till September 28, 2007 with no minimum requirement. After the promotion period, the rate could go bank to 5.25% APY, the rate before the promotion.

What do you considering when choosing an online bank account? And be sure to check out what others have to say in regarding what’s important to them when they look for an online bank account.

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11 Responses to “What I Consider When Selecting an Online Savings Account”

  1. Zeron |  May 04, 2007 at 2:32 pm

    I am hesitant to open too many bank accounts especially if the bank is small or new because of security issues. These banks asks for ssn, birthdate, address, etc. I just can’t trust the security infrastructure of these banks. Security is a big priority for me nowadays because of identity theft growing rapidly.

  2. Sun |  May 04, 2007 at 3:36 pm

    Zeron: Actually, you reminded me what I missed in the post: the reputation of the bank. I don’t use a bank that nobody has ever heard of. When a bank is new to me, I usually search to see what others say about the bank and how long they have been around. The longer the history, the better. If the online bank is just a division of a brick and mortar that has been around for a while, I usually think it’s safe. IGoBanking is an example. It’a division of Flushing Savings Bank in NY.

  3. ct |  May 04, 2007 at 11:01 pm

    Thanks for pointing out the transfer-out limit. What is the difinition for tranfer-out or bill payment? The bill payment has no limit. I guess I can pay bank B from bank A or transfer from bank A to bank B. Can we use payment to solve the transfer-out limit?

    Thanks!

    ct

  4. Sun |  May 07, 2007 at 7:45 am

    Though I never saw the official definitation of transfer-out, I think it refers to any money move out of your account through the account’s fund transfer function, instead of through bill-pay function. Once you have an accoiunt with a bank, you are allowed to set up a number of external fund transfers by using routing numbers and account numbers. Any money transferred to these external accounts belongs to transfer-out.

    I never tried to use bill pay fro these online banks, so I don’t know if that would be considered as part of transfer-out.