Updated on 05.12.10

Can You Actually Make Money Chasing Rates?

Trent Hamm

One common tactic I see on personal finance blogs is what I like to call “rate chasing.”

This tactic usually involves carefully watching the yield rates on savings accounts over at Bankrate.com (or a similar service), always signing up for one of the top accounts, and transferring their savings to that highest-yield bank.

For me, at least, I don’t find this tactic of much use at all. Here’s why.

The interest difference between a good bank’s interest rate and the top interest rate is pretty small. I took a look at Bankrate’s 50 newest additions to their database and sorted them by APY. The best rate found on that list was 1.40%; the median one (the one in the middle) was 0.95%. In other words, you’re gaining just 0.45% by choosing the top bank over a random bank.

That’s not much money. Let’s say you have $5,000 sitting around to play with in this fashion. The amount you’ll gain over the course of a year is $22.50 by rate hopping from the median bank above to the top bank above. And, in truth, it’s usually worse than that.

It takes time to locate the right offers. In order to keep up with these offers, you have to visit sites like Bankrate very regularly to find out what’s on top today. This is a small, continual drag on your time as you have to actually evaluate the top offers to make sure there’s not some sort of catch and to make sure that the rate was actually reported correctly to Bankrate.

It takes time to sign up for new accounts. If you do find a new offer, you have to sign up for that account. This can be an arduous process depending on their sign-up procedures, sometimes requiring mailing documents back and forth and waiting quite a while – another source of eating away at your valuable time.

The more accounts you have, the more identity risk concerns you have. While banks have amazingly strong security procedures, no security system is perfect. Each individual bank might have a 99.9% chance of keeping your personal data safe this year, but if you have fifty accounts out there, the chance of all of your accounts being safe this year drops to 95%. Identity theft is a real mess to clean up, so it’s worth your while to minimize the number of access points to your personal data.

Diminishing returns are in effect. Let’s say you’re at a bank offering 0.5% on your savings account. You can earn at least a little by hopping to an account earning 1.3%, right? That’s $80 extra per year on $10,000.

But once you’re in that 1.3% account, the benefit of the next leap is much smaller. You might dig for a while and find a 1.5% account, earning you $20 for the jump per year. The next time, you have to search a long while to get 1.6%, earning you $10 more.

My approach is simple. I usually encourage people to simply get an online savings account with a great customer service reputation and a reasonably competitive rate and just stick there without worrying about what other banks are doing with their rates.

Would I ever rate hop? Yes, in certain situations, I would rate hop. First, the interest rate competition in online banks would have to heat up. If you were seeing a top rate of 6% APY versus a median of 3%, then you’re talking about some significant interest. This is particularly true if you’re dealing with a large balance – say, $50,000 or more. 3% of $50,000 is $1,500 – that’s definitely worth your time.

But that doesn’t reflect the reality of the banking market and it also doesn’t reflect the day-to-day reality of most people. So, for now, I have to say that rate chasing is a pretty ineffective tactic for spinning more money out of your savings.

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  1. Check the rates at your local credit union. I am currently getting 4% on a checking account. All I have to do is have electronic statements, 1 automatic transfer/deposit each month and 10 credit based transactions each month, essentially everything I have already been doing.

    Maybe there will be similar offers in your area.

  2. ***Correction: 3.55 APY

  3. Des says:

    I don’t understand why you would break down the savings of baggie washing to the penny, but won’t do it for rate chasing. It only takes a few minutes to open an account online, and if that few minutes will “spin” $80 per $10,000 each and every year, why WOULDN’T that be worth your time? That $4,800 an hour if it takes you 5 minutes to open the account (more if you have more than $10k in savings). Additionally, to save money cleaning baggies or making laundry detergent you have to keep doing those activities over and over. This is a one time deal that just keeps giving each and every year. I don’t get your logic…

  4. MBirchmeier says:

    I came here to say pretty much the same thing as Steven. I switched over to a local bank with pretty much the same thing, 4% interest on checking (up to $25k, it’s like .75% over 25k, and savings interest rates are 2.8 or so), 12 credit transactions, 1 auto transfer or deposit a month, electronic statements.

    I used a site called kasasa. to find a community bank near me, with good rates. I might not have gotten the best rate available, but it didn’t take me too long to find the account. I guess I succumbed to their advertising in this case.


  5. I would agree that it may not be worth the trouble to go from an account with .95% to 1.4%. But, I wonder how many people are actually “rate chasing” for ONLY that reason.

    However, I would say that it is worth it to temporarily open a few accounts for the promotional bonuses. I just opened a couple this week, and will receive around $100 for each.

    Granted, in my particular case, I am unhappy with my current online bank and am scouting out a new one, but still I think a few minutes of my time is worth $100. (BB&T, Chase, BofA all have these promotions currently, as well as others).

    So, while I wouldn’t necessarily “chase rates” for APY on a checking account, I do think it is worthwhile to “chase promotions”.

    What are your thoughts on that one?

  6. Evan says:

    Rewind the clock on your blog and other PF Blogs that have been around for a while and you’ll see article after article about rate chasing and bank bonuses.

    Wow things have changed lol

  7. lurker carl says:

    “The best rate found on that list was 1.40%; the median one (the one in the middle) was 0.95%. In other words, you’re gaining just 0.45% by choosing the top bank over a random bank.”

    I beleive the gain realized going from a 0.95% rate of return to 1.4% is nearly 50%. It isn’t much money if you don’t have much to begin with. And you won’t if you don’t persue the best return on your savings.

    Banks and credit unions have all sorts of interest rate promotions to attract deposits from new customers as well as their current ones. The popular 4% rate (even with the) is almost triple that of the savings account example, isn’t that worth rate-hopping for?

  8. PureFi says:

    I don’t know, I value my time very highly and don’t want to spend it chasing rates. I also think there are other reasons (like customer service and corporate responsibility) to consider when deciding who to bank with.

  9. lurker carl says:

    Restrictions. Even with the restrictions.

  10. Andrew says:

    Great article, but just wanted to add that another bad aspect of rate chasing is that you also don’t get interest for the time your money is in transit (i.e. transferring from one bank to another). It really only makes sense if (a) you are dissatisfied with your current bank (b) the rate jump is very high or (c) you have a large amount of money where fractions of a percent make big differences.

  11. Brent says:

    Never rate chased, but I’ve let my bank know that if they drop the interest rate on the rewards checking that I’ll be moving my money elsewhere. I’m not saying you should always go with the highest rate, but a rate decrease should be a sign that someone else can better fit your needs.

  12. Debbie M says:

    Another problem – It takes time to transfer money from one bank to another. During that time, you are earning no interest at all. If you do this very often, that could add up.

    Another problem – That 0.45% improvement in your rate could diminish over time. This happened to me several times.

    Another problem – Every time you open a new account, that’s another institution you have to keep track of at income tax time. Even if you close accounts when you switch, you need a system to remember which accounts were open during the year in question when filling out your form. Also, Turbo Tax wants to you fill in the bank’s address and a bunch of other annoying stuff.

  13. Ruth says:

    I also have a 4% rate on my checking account (with restrictions, as noted above) and a 2% rate on my savings (no restrictions) so your quoted rates sound pretty out of whack to me. It look me about 5 minutes to find these rates when I signed up a year ago.

  14. Ruth says:

    I just checked my bank and the 2% savings rate is still available for balances up to $35k. (Redneck bank – the online branch of Bank of the Wichitas) So assuming that you have 10 minutes to spare to open an account, 10k in savings, and currently get a rate of .95%, that’s a yearly increase of $105 interest.

    As Debbie mentioned, though, there is usually no guarantee that the rate will remain high.

  15. Steve says:

    Aren’t we all supposed to have 6 month emergency funds? That plus the cash-equivalent portion of my conservative (3-5 year time horizon) down payment fund is a bit more than $10k.

    On the other hand… I am skeptical that anyone can open an account in 5 minutes. At least, not if you read contracts before you sign them.

  16. partgypsy says:

    I side with Debbie and Trent on this one. Maybe if there is a bigger spread in rates, (or I have more money) it will make sense. It isn’t a one time deal. It’s not like a cd where you can lock in rates; the rates are subject to change all the time and the first place bank can be third place weeks or months later. There is also the costs of time, updating all your info, and bookkeeping for tax purposes. Chasing rates is a very apt way of putting it.
    However, like house and auto insurance, phone and other services it is a good idea to check, maybe once a year the rates and compare.

  17. Mary W says:

    I’ve never been a rater chaser…just too lazy.

    OTOH my father always looked for the highest rate and consequently had CDs at 6 or 8 different financial institutions. Some on-line, others traditional. When he died it was a pain in the neck to close all the accounts. All wanted a death certificate, but each otherwise had slightly different forms/procedures. It would have been a lot easier for his heirs to have dealt with just 1 or 2 institutions.

  18. Sara says:

    @Des: It’s not necessarily a one-time deal. As Debbie M pointed out, the interest rate can always change. You might move your money to an account with a slightly higher interest rate only to have the rate drop a month later. Then you’ll have to start over to find another bank with a higher rate.

  19. lurker carl says:

    The point isn’t to move money into every bank that pays a marginally better rate than the current one. Just like checking out insurance rates, cell phone plans, cable service and such; it pays to shop around every so often to see what the competitors are offering. You need to stay on top of spending and earning.

  20. Chris says:

    I’m with Des. You wish baggies and make your own laundry detergent but won’t rate hop? Also as Steve pointed out, a 6 month emergency fund is going to be quite a bit more than $10,000 and quite a bit more interest.

    I really enjoy your blog and the comments here but I think you often get carried away trying to justify your own decisions in this column. Yes, rate hopping is a pain but if you calculate it on a $/hr basis (as you love to do), I don’t see how you can recommend not doing this. Just following your past logic, not my own. You need to be more consistant on how you do your money evaluations or you are just manipulating $$$ to get the answers you want. You owe it to your readers to follow some type of consistant logic and money analysis.

  21. ChrisD says:

    I agree that constantly chasing after 0.05% of interest is probably a waste of time.
    On the other hand banks will always lower their interest rates over time so you need to keep an eye on things and move money around if the rate gets too low. I think they are deliberately trying to get free money (i.e. pay no interest) to people who are not on top of their money. For example I had a high interest tracker that gave me a pathetically tiny amount of interest this year. To be fair they guaranteed me at least 1% below Bank of England, which would have been -0.5% so compared to that 0.2% is not so bad. But I immediately shopped for another account and found an account offering me 3.15%. But only for one year. So after that I will have to shop around again.

  22. cm says:

    I my case, finding the highest rate I can (in a high-interest checking acct) makes sense, because, since I am a in an “all-cash position” as they say, the principle is large.

    But I don’t agree that it takes five minutes to set up an account. It probably took me several hours of work (researching, mulling, signing up, filling out forms including a notarization and fingerprints, a mistake, faxing, etc.) and took a few weeks before I was getting that rate.

    Still, totally worth it to me–those hours will pay a difference of thousands each year if the rate lasts. As it is, I’m kicking myself that I put it off for several months and wasted hundreds that way.

  23. I understand your frustration with rate chasing, but think about a mortgage. A quarter of a percent is a big deal when spread over 30 years. Likewise, these small differences for deposits will make a difference over time, especially for those who are cash heavy. Rate chasing is more like penny pinching, nothing wrong with being frugal.

  24. Aaron says:

    I don’t do it unless it’s easy to do, and I happen to notice a significantly better rate. For example, I already had a SmartyPig account when I noticed ING Direct kept lowering their rate. With SmartyPig being 2% and about to raise their rates to 2.15%, it only took me a few minutes to setup a transfer. Why not?

    I won’t constantly research the rates, and unless there’s a massive interest rate difference, I wouldn’t even bother opening up an account with someone else though.

  25. Bill says:

    These days inflation makes a bank account into a losing proposition anyways.

  26. I think this is where you can get “too deep” into the whole money thing. If it takes you several hours a week to track this stuff, and the return on the time is fairly minor, then its not worth doing.

    I always factor in how much time something needs in order to determine whether I will do it or not.

  27. Jonathan says:

    I might be wrong, but it sounds to me like there are two different topics being discussed here. Several of the comments seem to be promoting shopping around for the best interest rate, similar to the way one would regularly shop around for cheaper insurance or lower credit card interest rates. The way I read Trent’s article, however, it seems that he is talking about rate chasing in which people are regularly moving their money around to get the best rates. Doing this several times a year seems a much bigger deal than doing once a year or every couple of years.

  28. Mike says:

    The point of the article for me (which I agree) is to really factor if the time spent chasing rates is worth it.

    If you’re talking about a few thousand dollars .45% isn’t really worth it. Of course compared to the savings rates at many of the Rewards Checkig accounts where you can earn up to 4%, it would make more sense to hope. But comparing apples to apples, it also wouldn’t make sense to rate hope among the Rewards accounts.

    Its good to place a value on your time.

  29. Suba says:

    Oh forgot to add, its not a big deal to find high yield account these days. Checking finder and kasasa pretty much covers everything I guess.

  30. Shop around for great rates AND chase rates on an automatic schedule (every two months?). Have fun. Don’t fall in love with a bank, they don’t care about YOU.

    Dollars Not Debt

  31. Debbie M says:

    I do like rate chasing when it involves a new kind of instrument. I-bonds were awesome when they were first created (over 3% interest plus inflation). Online savings accounts were worth adding to regular savings accounts. The new high-interest checking accounts are worth looking into for those willing to follow the rules. And I admit I just opened an account at Smarty Pig, which likes to pay above average interest (soon to be 2.15%) for people with balances under $50,000 because they get kickbacks from companies that provide discounted credit cards for savings account holders.

    However, moving from one online savings account to another or from one high-interest checking account to another (or one Smarty-Pig to another?) is no longer worth it for me. I think it might be worth it to always roll over CD’s to the highest thing I could find, if I didn’t have too many, though right now I’m too lazy.

  32. Money Smarts says:

    I think chasing rates can be a good thing if you’re moving from an account with an abysmal rate, to one with a rate near the top. For example, I just moved our online savings account from our old bank that now has rates of about .50%, to an account with a rate of 1.30%. Of course making the switch isn’t going to make us a ton of money – a few hundred a year based on our balance, but it is enough to make it worthwhile.

    Now would I switch from this new account to another new one based on a jump from say 1.30% to 1.40%? Probably not – diminishing returns because I’m not making that much more by switching. Add that to the fact that we’re now with a bank with good customer service and other benefits that we enjoy, and we probably wouldn’t rate chase again unless it was a significant jump again.

  33. Bill says:

    Don’t you have to provide proof of citizenship by physically mailing a photocopy of your drivers license now because of the anti terror laws to open an online account? It would take a lot more than 5 minutes for me to find a stamp or an envelope in my house.

  34. Vicki says:

    I agree with most of this post, except for the recommendation about internet banks. I think that the only way we can get banking services that are reliably serving our needs is to use local community banks or local community credit unions. There is nothing like being able to look someone in the eye when there is an issue. They work harder for our business, so are usually quite competitive with their rates, plus—you’re keeping money in your community, which is good for you and all your neighbors (as is buying local first). I don’t see much difference between the internet banks and the behmoths like Bank of America or Wells Fargo, there is no real connection and no real accountability. I’m not saying that a local community bank or credit union will be perfect, though they will certainly try harder to be! (At lest, that’s my experience).

    P.s. No, I do not work for any bank or credit union

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