High-interest rate savings accounts seem lucrative, but they come with a set of terms and conditions and may not be something you should sign up for just for the higher interest rates.
High-interest saving accounts, at first glance, seem the best of both worlds. They are safe, plus they offer a high-interest rate, sometimes almost as high as FDs. Parking money in a savings bank (SB) account with three to four per cent interest per annum is a loss because the money is not protected against the erosion of inflation, effectively decreasing the value of money. So it seems to be a great option to park one’s money.
Different banks follow different strategies to remain competitive, and the high-interest savings account is one such plan offered to customers. “Unlike the usual 2.5- four per cent interest on SB accounts, these accounts offer what are typically fixed deposit (FD) rates on SB accounts.,” says Adhil Shetty, CEO, BankBazaar.com.
Higher Minimum Balance: Most banks will require you to have a high minimum balance. Some banks have a substantially higher charge for value-added services including cash withdrawals. “Many banks offer this rate only on balances of more than Rs 1 lakh. So the first Rs 1 lakh earns the usual 2.5 per cent and the next Rs 1 lakh or more earns an elevated interest. Other banks may offer you an elevated rate on all the funds in the SB account so long as it is more than a certain threshold,” says Shetty.
However, in all cases, the bank will have a threshold over which the higher interest is payable. So, switching banks would make sense only if you have a higher amount lying in the SB account.
You Be Wiping Out Your Financial History: In many cases, the SB account is usually a long-standing one and has a long history of payments and receipts. A relationship with a bank is always good, as the bank knows you as a customer and may offer you more customized products and loans with lower interest rates on loans.
“It is the basis of your relationship with the bank and could even have an impact on your credit history. So, closing such an account to switch to another bank for a higher saving bank rate can mean wiping off a chunk of your financial history and relationship with a bank, which may not be a good idea,” says Shetty.
Additionally, money kept in a savings account should be used for regular transactions only and should not be considered an investment.
“Considering the returns, tax liability, and risk, for a conservative or moderately aggressive investor, there are better financial instruments to match similar returns with better tax efficiency to park money. (e.g. arbitrage funds, low duration funds, or ultra short-term funds, etc.),” says Amar Ranu, head, investment products and insights, Anand Rathi Shares, and Stock Brokers.
Whether you switch banks or opt for a different scheme with the same bank, read and make sure you understand all the terms and conditions before you sign the dotted line.