April 16, 2020

How Online Savings Accounts Work

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Why do online savings accounts offer higher interest rates than big banks? Find out if online banks are FDIC-insured before switching.

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Are online savings accounts a good idea?
Online savings accounts are a good idea for almost anyone looking for a savings vehicle. Online savings accounts usually offer higher interest rates than traditional savings accounts, which helps your money grow more quickly. In addition, banking online is generally more convenient.

How Online Savings Accounts Work

You deposit money into your account. Then banks lend this money to customers through personal and business loans. The borrower pays interest on their loan to the bank. Online banks offer higher interest rates on your savings because they do not need to maintain physical branches.

Below we detail more of the key differences between online savings and traditional savings so you can determine which is best for you.

Is your money stuck in an online savings account?
You can withdraw your money from an online savings account at any time. Just be aware that some banks may charge a withdrawal fee or have restrictions on how often you can make a withdrawal.

Online Savings vs Traditional Savings Accounts

Here's what you'll need to consider when choosing which type of savings account to open:

Annual Percentage Yields
Online savings accounts usually have higher APYs than traditional banks, ranging from1.5% to even 2%. With the power of compounding interest, your balance would grow a lot more quickly.

On the other hand, traditional savings accounts usually offer rates below 1%, the average being about 0.1% as of early 2020.

Fees & Service Charges
While some online savings accounts advertise no monthly service fees, keep in mind that those fees are usually waived only if you're able to keep a minimum balance. However, many traditional savings accounts do this as well.

Check with traditional banks and online banks to see what fees they charge and how you may get certain fees waived.

Application Process
Most traditional banks now let you apply for an account on their website as well as at physical branches. Online banks will guide you through a similar, straightforward process on their website.

Whether you apply online or in person, the personal info required is usually the same. You'll need a government-issued ID, your SSN, and a mailing address.

Average time of account approval will depend on the bank, though it's typically quick. Approval can take anywhere from 10 minutes to 1 day, with online banks usually making a quicker approval.

Required Opening Deposit
Many savings accounts, whether traditional or online, require you to deposit money into the account to officially open it. How much you need to deposit depends on the bank (some require as little as $1). Research each bank to learn what amount is required and if they allow a grace period to make the opening deposit.

Required Minimum Balance
The required minimum balance is the amount you need to have in your account to keep it open. If you don't maintain that amount, you could face a fee. Don't try to open a new online savings account if you do not have enough funds to meet the bank's minimum deposit requirement.

Some banks may have a daily or average monthly balance requirement. Ask the bank directly which, if any, they enforce.

Transfers & Withdrawals
Both online banks and traditional banks are required to limit the number of transfers and/or withdrawals that customers make from a savings account (for transfers, usually no more than 6 per month).

Online banks may also take slightly longer to process transfers and withdrawals. Learn each bank's transfer/withdrawal policies and what fees you might incur by exceeding the limit.

As you might expect, deposits are slightly easier with a traditional savings account. You can stop by your nearest branch and deposit a check or cash in just a few minutes.

Online banks require a few more steps. You can deposit into a traditional bank to transfer over, use an ATM that works with your bank, or buy a money order, among other options.

Can I deposit money at an ATM that's not my bank?
Many banks, whether online or traditional, belong to an ATM network (such as AllPoint or Money Pass) that lets you deposit money into your account even if it's not owned or operated by your bank. However, be aware of any fees you may incur by using any foreign ATMs.

Customer Service
Customer service is another area where traditional banks may outshine online banks. With traditional banks, you can interact face-to-face with tellers to discuss your banking needs.

While online banking does not provide that option, some online banks still provide impressive customer service via the phone or chatrooms. Check the reviews for customer service for any bank you are considering for a savings account.

Product Offerings
Traditional banks may also have the advantage when it comes to selection of financial products, like mortgages, auto loans, insurance policies, and more. Many online banks specialize in just a few types of accounts at most. If you're hoping to bundle several products from the same institution for easier banking, consider a traditional bank instead.

Are online savings accounts FDIC insured?
Most online savings accounts are insured by the FDIC in the same way that traditional banks are. Your deposits will likely be insured for up to $250,000. However, not all online banks offer FDIC protection, so be sure to check your bank's policy.

How to Open an Online Savings Account

Once you've decided to open an online savings account, here's how you can get your account up and running:

  1. Choose your bank. Research the terms and yields of different online savings accounts to find one that fits your needs.

  2. Gather your documents. This includes a government-issued ID, your Social Security number, and proof of residence/mailing address.

  3. Submit an application. Fill out an application online with your personal information.

  4. Fund your account. Transfer funds into your online savings account and include at least the minimum balance amount.

Best Online Savings Accounts

Not all online savings accounts are the same. It would be worth your while to compare the terms and offerings of each bank where you are considering opening an online savings account.

Here are some of the more popular online savings accounts today:

CIT Bank Savings Connect - 0.50% APY

  • Earn a competitive high yield savings rate with access and convenience features of an eChecking account.
  • Earn up to 0.50% APY on Savings Connect and 0.25% APY on eChecking.
  • Savings Connect is a tiered interest rate account dependent on the account holder opening a linked qualifying eChecking concurrently and makes periodic qualifying deposits.
    • Base Tier: (0.42% APY, 0.399% Interest Rate) A minimum qualifying deposit of $200 is not deposited each month into the linked eChecking or the eChecking account is closed.
    • Upper Tier: (0.50% APY, 0.499% Interest Rate) A qualifying deposit of $200 or more is deposited into the linked eChecking account each month.
    • APY assumes a qualifying deposit of $200 or more is made to the linked eChecking account each month.
  • Minimum of $100 for both the Savings Connect and eChecking to open ($200 total).

CIT Savings Builder - Earn 0.40% APY

Earn up to 0.40% APY. Here's how it works: Maintain a minimum balance of $25k OR make at least a $100 minimum deposit every month. Member FDIC

Online Savings Account - 0.50% APY

$0 minimum opening deposit. No minimum balance requirement. No fees to open or maintain account.

High Yield Savings - 0.40% APY

$0 minimum opening deposit. No minimum balance requirement. No fees to open or maintain account.

Citi Account Packages - Up to $1,500 Bonus

Open a new eligible checking account and savings account in the same account package for Citigold, Citi Priority, and Citi Account Package. Within 30 days of account opening, fund your new checking and/or savings account with the required minimum deposit. Maintain the required minimum balance in the account/s for 60 consecutive calendar days to earn corresponding cash bonus.

Account PackageMinimum Deposit and Minimum BalanceCash Bonus
Citigold Package$200,000$1,500
Citi Priority Account Package$50,000$700
Citibank Account Package$15,000

Expires 6/30/2021

Online Savings Account - Earn 0.40% APY

  • No fees
  • No minimum opening deposit
  • No minimum balance required

Citi Savings Account - Up to $2,700 Bonus

Open a new eligible Citi Savings account. If you open a Citi Priority Account Package, Citigold Account Package or Citigold Private Client, you must have or open a checking account in the same package. Client must enroll in this offer at the same time they open the eligible Citi Savings account. You may enroll online or by contacting a Citibank representative by phone or in a branch and asking them to enroll you in this offer. Deposit qualifying new-to-Citibank funds within 30 days of opening savings account. Multiple deposits allowed. Maintain the qualifying balance in the account for 60 consecutive days from the date the minimum deposit is reached to receive corresponding cash bonus. Offer available in NY, CT, MD, VA, DC, CA, NV, NJ, or select markets in FL or IL.

Minimum Deposit and Minimum BalanceCash Bonus
$25,000 - $49,999$75
$50,000 - $99,999$135
$100,000 - $249,999$275
$250,000 - $499,999$675
$500,000 - $999,999$1,350

Expires 6/30/2021

Citigold Package - $1,500 Bonus

Open a new eligible checking and savings account in the Citigold Account Package.

Within 30 days of opening your account, deposit $200,000 New-to-Citibank funds into the checking and/or savings account.

Maintain a minimum balance of $200,000 between the checking and/or savings accounts for 60 consecutive calendar days.

Expires 6/30/2021

eOne Savings Account

  • 0.50% APY
  • $10 Minimum Opening Deposit
  • No Minimum Balance Requirement
  • No Fees to Open or Maintain Account
  • FDIC Insured

Plus Savings Account

  • 0.50% APY
  • $5,000 Minimum Opening Deposit
  • $4 monthly service fee; waived with a daily minimum balance of $500
  • Daily Compounding Interest
  • FDIC Insured

Bottom Line

Online savings accounts can provide several advantages over traditional savings accounts, including high APYs, mobile convenience, and sometimes lower fees. Compare different terms and conditions to find an online bank that meets your needs.

When shopping around, be sure to see what APY the bank offers because that will help you grow your money. But also factor in other fees and restrictions that may offset your earnings.

Write to Rebecca M at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

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