You see more of them every day. Banks advertising yields of 5 percent and higher on money market accounts, basic savings instruments that are federally insured and let you add to the account at any time or withdraw funds without penalty.
Not a bad deal, especially when you need a temporary, safe garage for your cash while you ponder your next market investment.
After all, an MMA paying upwards of 5 percent is twice as good as the dinky 2.5 percent you see posted in most bank lobbies.
Better check those local ads carefully. To earn that 5 percent yield, you must usually deposit between $20,000 and $50,000, and in some cases it might be as high as $90,000. If your balance ever slips below $10,000, many banks will pay you only 2 percent or less on your money. And some outfits pay no interest at all on balances below $500.
You’d be better off scouting for the highest nationwide yield with a lower minimum deposit, and which offers even higher rates. For example, as of Oct. 1 the top MMA yield was 5.69 percent at Bluebonnet Savings in Dallas (800-343-5874), with a $5,000 minimum, according to Bank Rate Monitor. Capital One in Falls Church, Va. (800-608-3490), promotes a tad more on its Internet site (http://www.capitalone.com), 5.75 percent, but with a $25,000 minimum.
The rash of 5-percent-and-higher deals you’ve been seeing lately are usually tiered rates. In simple terms, it means the more money you deposit, the higher the yield. Typically, these rates rise at levels of $2,500, $10,000, $25,000 and $50,000.
Beware, though, of some of the pitfalls, such as lower rates, extra fees and penalties:
– Mutual Savings Bank in Milwaukee, competes against its MMA competition by pushing a “Golden Passbook” account yielding 5.5 percent on a $10,000 deposit–provided you don’t touch any of the money for 90 days. If you do, you lose all the interest, and if the balance ever sinks below $10,000, the yield plunges to 2.75 percent.
Also in Milwaukee, Guaranty Bank brags that its $2,400-minimum money market account at 5.2 percent outpays the 2.27 to 2.75 percent offered by local competitors. However, balances under $2,400 pay a paltry 1.26 percent, and below $500 the interest is zilch.
– Unlike most CDs, MMA rates can change at any time, so there’s no guarantee where the numbers will be a month or two from now. Yet, some banks try to make you believe otherwise. CenFed Bank in Los Angeles advertised a tiered account yielding a maximum of 5.07 percent on a $50,000 deposit, with a “5 percent minimum guarantee.” But according to a footnote in the copy, the “guarantee” was only for several weeks after the ad appeared.
– Other outfits may play with the calendar in different ways. First Tennessee Bank in Memphis promotes a whopping 5.75 percent in six-inch-high letters, but the catch is that the yield is good for six months. After that, it will drop to whatever yield the bank is offering at that time. In other words, the annual percentage yield isn’t for a full year, but for a half-year. And to earn that 5.75 percent figure, the customer must also open a checking account. Ditto Fleet Bank in the Northeast. It also requires a checking account for you to earn 5 percent on a $50,000 money market account.
– Meanwhile, Heritage Bank in West St. Paul, Minn., notes there’s a $20-per-month service charge if the customer’s balance on collected funds falls below $20,000, the minimum necessary to earn a 5.24 percent yield.
– By law, banks can allow up to six third-party transactions per month on an MMA, any three of which may be checks. At First Virginia Bank, there’s a $10 penalty if the customer exceeds that number. And if the account balance slides under $2,500, there’s a $10 service charge, plus the 2.6 percent interest is wiped out. Also in Virginia, Life Savings charges a $7 fee if the balance ever goes below $1,000.
Indeed, money market accounts are great, supersafe havens for conservative folks who can plunk down such middle-to-high-five-figures to open an account. But there’s more to those 5 percent deals than meets the eye.
Unless you have done a thorough job of asking all the right questions up-front about tiered rates, fees and charges, you’ll probably earn more by shopping the top-paying institutions free on the Internet at http://www.bankrate.com. Ask the institutions to send you, without obligation, a set of account-opening documents to look over–along with a list of their fees.
– Latest rate trend. The average MMA yield was unchanged at 2.65 percent, while 30-year mortgages remained stuck at 7.3 percent.
– Credit tip. Most credit cards don’t charge interest if you pay within one month of the billing date. But beware of cards whose grace periods start the day you charge something.
