From the depths of the recent credit crisis, a trend emerged of customers placing their money in the relative safety of the largest banking institutions. Soon after, the trend reversed as many people found the high account fees and low savings interest rates prohibitive to their personal financial growth. Instead of placing their money with the larger banking institutions, people are choosing accounts with smaller banks and credit unions because of the higher yields for savings and some of the best interest rates in the country.
Over the past two years, the amounts of deposits made at neighborhood banks and credit unions increased nearly 120%, making up the ground lost during the credit crisis and further increasing deposits at some firms. Much of this shift is due to the higher yields available at these financial institutions.
Some rewards checking accounts offered at smaller banks (those with less than $1 billion in assets) offer returns higher than 4% compared with an average of 0.1% at large institutions (those with more than $10 billion in assets). Basic savings accounts at the smaller institutions offer interest rates that are at least one percentage point higher than for similar accounts at larger firms. The smaller firms can afford to offer these high yields because, with fewer locations and less staff, their overhead for operation is much lower than that of the larger banks.
Although the smaller banks are offering much higher yields, there are some drawbacks to banking with one of these small institutions. Many of these banks have a limited number of locations, putting account holders at a disadvantage when far from their primary banking location. Smaller banks also have a lower number of ATM’s available in the cities where they operate. Statistically, smaller banks are more likely to fail, accounting for nearly 90% of the 157 banks that failed last year.
People that are interested in moving their money to a smaller banking institution should choose a bank that is FDIC insured and make sure to stay within the coverage limits. These banks tend to have numerous conditions attached to the higher-yielding checking and saving accounts and will reduce the yield if account activities do not meet certain criteria. Read all of the terms associated with the account and make sure that the criteria will be satisfied fully to get the highest yields from these accounts.
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