4 red flags about high-yield bank accounts

The old saying “If it sounds too good to be true, it probably is” still applies in today’s world of mobile and online banking. New high-yield accounts are being introduced in the internet and mobile world offering around 1.5 per cent on checking accounts (compared to the national average of 0.2 per cent) or more than 2 percent in savings accounts (compared to the national average of 0.3%). But they’re often not the great deals they seem once you get the hang of the details.

Keeping an eye out for these four red flags can help you identify potential problems before you decide to try one of these accounts.

The high yield account is not from a bank

The first red flag is if the financial company offering a high-yield account isn’t a bank or credit union, but that doesn’t mean the offer is a scam. This may be an investment account offered by a brokerage firm, not to be confused with a deposit account. Deposit accounts, such as a checking or savings account, are known to be risk-free because of federal deposit insurance.

In addition, banks and credit unions must follow specific regulations designed to keep these accounts secure. Different regulatory and insurance requirements apply to investment accounts.

High performance account does not exist yet

A number of financial technology (fintech) companies have attempted to enter the banking sector, usually by partnering with banks. This allows them to offer checking and savings accounts while the bank actually holds the deposits. Often these fintech companies are too aggressive in their launch schedules and promise more than they can deliver in terms of account returns.

A common practice is to use a waiting list before opening an account. Instead of applying for the account, interested new customers provide their contact information so they can be early applicants. The time from when waitlisted accounts are announced until the general public can apply for one can be years.

In short, it is easy for fintech companies to claim that they will offer a high-yield bank account. Actually doing it to the general public is another story.

The high performance account does not have a long history

Banks have long used teaser rates as a strategy to attract new customers. Unless account disclosures contain specific time guarantees, banks are free to adjust rates for checking and savings accounts. Therefore, it is common for a bank to offer a very competitive rate for a few months to attract new customers, and then adjust the rate to less competitive levels.

Internet banks have used several different variations of teaser rates. One approach is to continually come up with new promotional accounts with high returns. Banks are quietly ending promotional rates on existing accounts while introducing new promotional accounts for new customers.

Another strategy is to create new websites with new internet bank brands. Instead of increasing the performance of the existing accounts available on a website, a new website is created with a new internet bank brand with a higher performing account. Existing customers must open a new account on the new website to take advantage of the higher performance.

Before opening an account, review the account’s rate history to ensure it has a track record of remaining competitive over several years.

The high performance account has balance limits

A high yield account may not earn substantial interest if the high yield only applies to a small balance. For example, a savings account with an interest rate of 5 percent may seem like a great deal, but if the rate only applies to account balances up to $500 with no interest earned on top of $500, the maximum annual interest that can be earned is only $25.

Banks and credit unions often market high-yield accounts that have balance limits, and those balance limits are often not obvious.

Make sure you understand the details

Finding any of these red flags doesn’t mean the institution or account is a scam, but it does mean the account may not be the good deal it seems. Assessing the value of an account requires understanding the details. Any of the red flags can turn a high-yield account into a bad deal that won’t be a good fit for your banking and savings needs.

Ken Tumin is founder and editor of DepositAccounts.comwhich has been tracking and rating savings, CD and checking account offerings from banks and credit unions for more than a decade.