The Fed hiked interest rates again. Here’s why it pays to switch to an online bank


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It’s a move that could work in your favor to a large extent.

Important points

  • Online banks tend to pay higher interest rates on savings than physical banks.
  • With interest rates rising, now is a good time to switch to an online bank.

In June, the US Federal Reserve raised interest rates by 0.75%, marking the largest rate hike in decades. In July the same thing happened again.

The reason the Fed is raising rates so extremely is to slow the pace of inflation. Consumers have been grappling with sky-high living costs since the beginning of the year. And many run into debt on their credit cards just to cover their most important bills, like gas, utilities, and groceries.

Inflation is rampant because supply chains have slowed in the wake of the pandemic, leaving supply and demand mismatched. By raising interest rates, the Fed hopes to make borrowing expensive enough to prompt consumers to modestly restrain spending. That should narrow the gap between supply and demand and in turn help put an end to rising inflation.

Now, on the one hand, interest rate hikes are bad news for consumers because they can make it significantly more expensive to borrow, whether it’s in the form of credit card balances or any other type of loan. The benefit, however, is that they can also result in more generous interest rates on savings accounts.

This has been the case for the past few weeks. Many banks have increased the amount of interest they pay on savings accounts and certificates of deposit. However, if you want to take full advantage of the higher interest rates, it might be worth transferring your money to an online bank.

Why online banking really pays off

Physical banks need a lot of money to function. Among other things, they must occupy them, pay rent and leave the lights on.

Online banks also have to pay employees. But they don’t have to bear the costs of running physical stores. Therefore, online banks tend to pass these savings on to consumers in the form of higher interest rates on their savings accounts. And with interest rates rising due to Federal Reserve action, now is a good time to consider switching to an online bank.

Of course, that doesn’t mean you have to move Everyone your money to an online bank. If you have a checking account at a physical bank, you may want to keep it. This gives you access to various services, including ATMs, when you need a physical cash withdrawal. But when it comes to your savings, you could end up making a lot more money with online banking.

Will interest rates continue to rise?

In July, the inflation rate slowed down a bit compared to June, but this number was still very high. As a result, the Fed is likely to continue raising interest rates (although perhaps not to the extreme extent seen in June and July). That could lead to even higher interest rates on savings accounts, which is one more reason to start thinking about switching to an online bank now.

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