As I reported last week, SmartyPig announced rate changes for its savings account starting May 19th. Rates will go up from 2% to 2.15% APY for balances under $50K. For those with balances over $50K, there is something very important to note about this change. If a SmartyPig account balance goes over $50,000, the entire amount will earn the lower 0.50% rate, not just the amount above $50,000.
Also, it's important to note how SmartyPig defines balance. Here is what they specified in the letter from last week:
For purposes of calculating balances for determination of the rate tier that applies, total balances of all goals within your SmartyPig profile will be aggregated.
This is good news for those with savings goals under $50K. However, those with savings goals above $50K will want to make sure the total of all goals is below $50K before May 19th. Fortunately, with SmartyPig it's easy to change or end goals (see SmartyPig's FAQs).
I'm afraid some SmartyPig account holders may be surprised by this since it's rare to be punished for having a balance over a certain tier. It's the opposite of the typical rate tiers from banks which reward you with a higher interest rate on your entire balance when your daily average balance reaches a certain level. ING Direct's Electric Orange is a good example of this. If your EO balance is $49,999, your entire balance will only earn 0.25%. However, once you reach $50K, you'll earn 1.20% on the entire balance.
When rates go down for higher tiers, banks typically use a blended APY to determine the interest they pay. This is how reward checking accounts work. For example, the bank pays you 3% on all balances up to $25K. Over $25K, the rate falls to 1%. If your balance is $30K, the interest you would receive in a year would be 3% of $25K plus 1% of $5K.
For more information on SmartyPig, please see my SmartyPig review in which I review issues like FDIC coverage and transfer speeds.