Another Rate Cut at UFB Direct - Lessons for Rate Chasers?

When UFB Direct made its first rate cut on its Airline Rewards Savings account on January 18th, there were hopes that the rate would remain steady for a while. That didn't happen. There was just another rate cut yesterday which reduced the rate from 0.90% to 0.85%. The rates have fallen quickly in February after that first rate cut in January. You can see below how the rates have fallen over the last five weeks:

• 8/04/11 - 1.30% APY
• 1/18/12 - 1.10% APY
• 2/01/12 - 1.05% APY
• 2/07/12 - 0.95% APY
• 2/13/12 - 0.90% APY
• 2/22/12 - 0.85% APY

I was always worried UFB Direct would disappoint us. UFB Direct is a division of BofI Federal Bank (used to be Bank of Internet USA). BofI's savings and money market accounts don't have a history of being long-term rate leaders. One example was BofI's Advantage Savings Account which it first introduced in July 2009 with a 2.50% APY. As a comparison, ING Direct's Orange Savings account was paying 1.40% APY and Alliant Credit Union's savings account was paying 2.00% APY. In July 2010, BofI's Advantage Savings Account rate had fallen to 0.81%. As a comparison, ING Direct's Orange savings account rate had fallen to 1.10% APY and Alliant's savings account rate had fallen to 1.50% APY.

Bank of Internet and its rate cuts aren't unique. We've seen many other internet banks that start out as rate leaders but after a year or two, their rates become average or below average.

Here are some examples of rate leaders that didn't stay on top. There are many others. Feel free to list those in the comments.

• DollarSavings/Emigrant Direct
• FNBO Direct
• E-LOAN
• OnBank
• WTDirect
• SmartyPig
• Hudson City Savings Bank
• airbanking

There have been a few internet banks that have kept close to the rate leaders for at least two years. Here are three that are still near the rate leaders:

• Incredible Bank
• Alliant Credit Union
• Clear Sky Accounts

Sometimes internet banks have made comebacks with their rates. They started out several years ago as a rate leader. After a year or two, they fell to average or below average. Then after a couple of years, they come out with new competitive rates. These are often just promo rates in an attempt to get back some of the deposits they have lost. Three recent examples include:

• MyBankingDirect
• Flagstar Bank
• Salem Five Direct

Other internet banks have remained fairly competitive for several years. They rarely have been near the top, but they also have rarely been near the bottom of internet banks. Some examples include:

• SFGI Direct
• Discover Bank
• American Express Bank
• Ally Bank
• ING Direct

Lessons for Rate Chasers?

If you want a savings account rate leader, you should probably expect to switch banks at least twice a year.

New internet banks or savings accounts often remain near the top for several months. Those who got in early at UFB Direct were rewarded with 5 months of a top rate. The same has been true with MyBankingDirect. I'm sure that was the reason many jumped on TIAA Direct's new savings account. Unfortunately, many readers have not been able to open accounts (see review).

The easiest solution would be to just go with a near-rate-leader like Incredible Bank and Alliant Credit Union. However, it should be noted that they have been slowly moving down the rate leader list. Alliant Credit Union has a longer history, so I think it has a better chance of remaining a long-term winner.

Another strategy is to use reward checking accounts. You can get higher rates with reward checking accounts, but there are typically balance caps and monthly debit card usage requirements. Bank of Internet's Rewards Checking account is one exception. There are no balance caps. However, its rate isn't much better than savings accounts. The rate remains 1.25% APY (as of 2/23/2012). This rate hasn't changed since it was launched in July 2011 (see my review).

If you plan to hold a significant amount of money in liquid accounts because you don't want to be locked into long-term CDs, you might want to consider CIT Bank's 2-year Achiever CD with a minimum deposit. If rates keep falling, you can fall back to this CD by making one unlimited add-on deposit. I have more details in my CIT Bank Achiever CD review.

What's your strategy of earning the best rates with internet savings accounts?

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