Most US banks offer vanishingly small interest rates on their money market savings accounts, while many others offer rates around 1.0%. Assuming that I keep my deposits below the FDIC insurance limit, what are the downsides to these higher-interest accounts? Why would anyone go with lower-interest accounts?
The main reason people go with lower interest accounts is for convenience of having the money in the same institution with other accounts (like checking, auto loans, credit cards, etc.) with their local bank.
These online savings accounts are regulated by law to only allow 6 transfers out per month, so for people that need to make withdrawals more frequently, that can also be a factor. If someone has an account like this that is not part of their normal checking account, it can also be inconvenient to wait for an ACH to complete overnight before the funds are available in their main accounts.
I certainly use a higher yielding account for my very short-term liquid savings.
Without the details of a specific bank it's hard to give a definitive answer, but here are some potential valid reasons I can think of:
- Desire to use a savings account in the same bank that your checking account is in
- Discount on other services (e.g. loan rates) for having a savings account
- Preference of the bank trumps higher interest rates
- Not enough in savings to make the interest rate material
- Better services (free transfers, higher limit on transactions)
And most importantly
- People do not always make the best financial decisions