Beware of Zero Balance When Withdrawing from Internet Savings Accounts

With interest rates plummeting on many internet savings accounts, more people are transferring their money out of those accounts. If you do transfer out your money, make sure you don't go below the minimum balance that could trigger a monthly fee. If the bank claims not to have a minimum balance requirement for the account, you may be tempted to transfer out 100% of the money. You have to be careful when you leave a zero balance in your account even for banks which claim they don't have a minimum balance requirement. With a zero balance, the bank may consider the account closed, and they may not pay interest for that month. For these cases, it's best to leave at least $1 in the account until the interest for the previous month has been credited.

A reader emailed me a problem that he had with 1st Constitution Direct. He transferred all of his money out before the end of the statement period, and 1st Constitution Direct is refusing to pay him the interest accrued for the last month. 1st Constitution Direct does state in its FAQs that there is no minimum balance requirement:

Must I maintain a minimum balance in my 1st Constitution Direct account?

You must open your account with the required minimum initial deposit. Once your account is established, there is no minimum balance requirement.

The reader also forwarded me an email from 1st Constitution Direct which informed him the account has not been closed yet, but it will be closed if he doesn't fund it. Unfortunately, they don't appear to have a copy of the terms and conditions on their website. Based on the FAQ, it sure seems that the fair thing to do would be for 1st Constitution Direct to pay the accrued interest for February.

I've seen a similar issue happen at Emigrant Direct which also claims on its website to have no minimum balance requirements. Emigrant Direct's disclosure does state that "If you close your Account before interest is credited, you will not receive the accrued interest." However, I don't see where they say that a zero balance is equivalent to having closed the account.

Even if you are right in terms of the fairness of this issue, it's not worth the time or the money. Just make sure you leave at least $1 in any "no-minimum" account until your interest is credited. Then you can transfer out the remaining balance.

It's a good idea to check with the bank for account closure instructions and to ensure you won't be hit with any fee. For most internet banks the typical process is to transfer your remaining balance out and then send them a secure message instructing them to close the account. Just be sure you receive your last month interest before you transfer out all of your funds.