Wednesday, March 15, 2017

The Sneaky New Trick Banks And Credit Unions Are Using

As my family gets ready for a move to a new state, I've spent some time looking for a new bank or credit union to handle our finances in our new location. Currently, I use a local credit union for my day to day banking needs and, although it is possible to perform most transactions at out of state credit unions through a program called Shared Branching, I don't want to use this as a long term solution for my banking needs after I relocate. (One reason is that I wouldn't be able to get a mortgage on an out of state property.)

Deceptive Advertising?

So I've been researching various financial institutions, looking for one that provides the services that I need at rates that are competitive. During this process, I came across this advertisement for rates on checking and saving accounts:

Holy cow! Over 4% interest on checking and savings accounts! I haven't seen rates that high in over 15 years! My current vanilla savings account pays 0.05% and my checking pays nothing. Even online banks are only paying around 1%.

And then I noticed the fine print:

Clicking the link for more details, I found out that high interest rate only applies to the first $500 in your account. Any balances over $500 earn just 0.1%. (Although low, that is still double what my current credit union is paying me.)

(Click to see the whole image)

The Carrot Instead Of The Stick

Initially, I was upset with what seemed like a blatant bait-and-switch, but then I started thinking about it more and came to the conclusion that this is actually a positive for the consumer. This particular credit union has free accounts - really, truly free with no minimum balance requirements. The high interest rate on the first $500 appears to be an incentive for people to maintain a minimum balance. I much prefer this to what most institutions do - create a disincentive for people by charging a monthly fee for a low balance.

Kudos to this credit union for taking this approach! They just earned my business!


  1. I am still using my bank which is based in the Pacific NW even though I've been in Arizona for over a year.

  2. Is your mortgage with them? (Or do you even have a mortgage?) If I didn't need a mortgage, I would probably also stay with my current CU when I moved, but I'm pretty sure if I bank at the same place my mortgage is at, I'll get some sort of discount.

  3. So I just did a quick bit of back-of-the napkin math here, and this doesn't quite seem as awesome as I thought. It's an interesting account, but it doesn't really provide nearly the benefit that one would think. It's great for your low balance checking account and that's it.

    Unless I'm bad at math, here's where the bank is "conning" you out of money with a misleading rate offering.

    Let's say you had $10,000 in an account. You know, just a rainy day emergency fund. Now if you were to put that money in an online savings account at 1%, you would earn $100 in interest in your first year. Now instead, let's say you put it into this account. Let's say it's an even 4% for the first $500 and 0.1% after that. 4% on $500 is $20 and 0.1% on $9,500 is $9.50, giving you a grand total of $29.50 in interest in the same amount of time on the same money.

    Because 4% of $500 is $20, you need to keep less than the amount that would get you that much in a 1% online savings account in order to make it worth parking your cash there instead of the aforementioned online account.

    It's actually pretty good for a low balance checking account. But something like that is a bonus and nothing more. The lack of fees is more of a draw, in my opinion. The savings account isn't particularly valuable unless it has cross sell benefits that activate when you have the two accounts linked (such as sweep overdraft protection). I would use that as a basic checking and savings, but keep your liquid savings/emergency fund in an online savings account earning roughly 1% instead.

    I still like the idea of an incentive rather than a disincentive--a carrot rather than a stick--but it makes no sense to me from the institution's point of view. They literally punish you for having MORE money with them and they're taking in nothing from fee income. I know credit unions are not-for-profit institutions, but they still need to be making money in order to provide their namesake credit. Not sure how this is working for them from a business perspective.

    ARB--Angry Retail Banker

  4. I totally agree. You're not going to make much money with this account and you can do better elsewhere. However, I like that it is a carrot not a stick. Zero or any positive amount they give you is better than a monthly fee. That was my point. I would use these accounts for day-to-day uses with maybe a max or $1,000 - $2,000 in there. Definitely not for large amounts.