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Finding the best bank deal
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December 9, 1997: 5:29 p.m. ET
CD and money-market interest rates can vary by 3 percent or more
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NEW YORK (CNNfn) - Q: What's the biggest money mistake that consumers make with their bank?
A: Automatically sticking with the same outfit year after year, instead of comparing what other institutions are offering.
Many consumers insist on keeping their cash at Megabuck Bank because Mr. Goober, the manager, knows them by first name, or Wanda the teller has the greatest smile in town, or the bank happens to be "convenient."
Unfortunately, this habit could cost you hundreds of dollars per year.
In Philadelphia, KeyStone Bank currently pays 4.19 percent on its money-market account, which has several restrictions but still yields some 3 percentage points more per year than the meager 1.25 percent offered at nearby CoreStates.
Thus, customers who keep $10,000 in a CoreStates money-market account are cheating themselves out of some $300 in extra interest per year.
The CoreStates account's interest doesn't even keep up with the current U.S. inflation rate.
Moral of the story -- it pays to shop around.
A smart shopping strategy should also apply to CDs.
Currently, Detroit's D&N Bank pays a whopping 6 percent on a five-year CD, compared with only 3.6 percent at rival Great Lakes National Bank. The disparity works out to a $240 difference on a $10,000 investment. Over five years, that adds up to $1,200 in lost interest.
Those searching for the best deals should also consider out-of-state banks, which compete nationwide for business while carrying the same $100,000 FDIC insurance protection that your local hometown institution offers.
It's easy to open accounts by phone with these banks, simply by calling toll-free on the institution's own nickel.
And the highest-interest-paying banks are safe -- 95 percent of them currently enjoy top three-star and two-star safety ratings from Veribanc Inc., a respected independent research organization.
Typically, banks with a nationwide scope offer CD rates more than a full percentage point above the industry average. On money-market accounts, nationwide banks currently pay more than double the national average.
Example: First Market Bank of Memphis, Tenn., currently offers a money-market account yielding 5.85 percent -- 3.23 percentage points better than the current national average of 2.62 percent. However, bear in mind that this account has a $10,000 opening minimum.
If that's too steep for you, Atlanta Internet Bank (888-256-6932) pays 5.5 percent on a money market with a $100 opening minimum, while American Chartered Bank of Schaumburg, Ill. (847-517-5400) offers 5.29 percent on an account that takes just $1 to open.
Caution: You might see ads for bank money markets yielding anywhere from 5.25 percent to 5.75 percent, but there's usually a catch.
Virtually all of these are "tiered" accounts, meaning the more you deposit, the higher the yield you receive.
Unfortunately, you usually have to put up $20,000 to $75,000 to earn the advertised rate. If your account balance ever sinks below $10,000, you'll probably get a yield of just 2 percent or so.
-- by Robert Heady for CNNfn Interactive
(Heady is publisher of Bank Rate Monitor and co-author of "The Complete Idiot's Guide to Managing Your Money." Readers with banking-related questions can e-mail him here. Heady will address questions of general interest in future columns, but regrets that the volume of mail he gets prohibits him from answering all e-mails received.)
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