Three Key Advantages to Banking Online

By Sierra Black

In the market for a new bank? Before you hit the pavement looking for the best local branch, consider moving your banking to an online bank. Online savings accounts often have the best rates, and in general these banks provide great service with lower fees.

Online banks have become increasingly popular in the past several years for one simple reason: they really can offer a better deal in the form of higher savings account interest rates.

If you're getting started with savings accounts, there are three key advantages to considering banking online.

1. High Interest Rates

Online savings accounts can typically offer better interest rates for a savings account. They can offer you a better return because they operate more cheaply than brick-and-mortar banks. They have smaller space needs, fewer staff, and less waste. It's just a less costly business model.

Because they pay out less in rent, employing tellers, electricity, and all the rest, online banks can pass along part of their savings to you in the form of the highest savings rates. It's possible that an online savings account may offer an interest rate several times that of the FDIC national average.

Of course, it's not always the case that an online bank will always offer better savings account interest rates than a traditional bank. But in comparing the best savings account rates online, you'll probably find a lot of online bank names among the top of the list.

Once you have an online savings account, you'll still want to keep abreast of rate fluctuations. That way you'll know if your interest rate is sinking and it's time to jump ship. Small fluctuations in rates are to be expected; the top interest rate today may not be at the same bank as the top interest rate tomorrow. But if your high-interest savings account rate is trending downwards over time in relation to other banks, you may want to consider switching banks. (For more about the costs and benefits of switching banks, read our article, Should You Always Chase the Best Savings Rates?)

2. Lower Fees

For much the same reason online banks offer better interest, they also typically charge lower fees for everything from checking overdrafts to monthly account maintenance. While bank fees seem small, they can add up to big bucks. In 2009, banks raked in over $30 billion in overdraft fees alone, according to Reuters.

An online bank may waive overdraft fees entirely, charging only interest on an overdraft line of credit. They also tend to have lower fees on their investment accounts. Debit cards are usually free. Because they don't have brick-and-mortar branches, online banks often pick up the charges for your use of other banks' ATMs, saving you another common bank fee. They frequently offer free services like online bill pay as well.

3. The Right Mindset

Online banking is particularly good for savings accounts. Why is that? With a savings account, the one big drawback of online banks can become an asset.

With an online savings account, your money is just a bit harder to get to. An online checking account will come equipped with a debit card, which you can use to withdraw cash or make purchases. But transferring money out of an online savings account to another bank with branches can take up to two business days.

That sounds like a downside, but remember that your savings account is where you want to keep (not spend) your money. That two-day lag discourages impulse spending. A lot of things that tempt you to break the piggy bank in the heat of the moment won't seem as important when you've had two days to cool your fire.

That mindset, and the security of having your money slightly more out of reach, can be the mental trick that turns spendthrifts into savers. If you need the extra boost of willpower to keep your paws off your retirement nest egg, an online savings account is a great tool.

Online Savings Accounts Aren't for Everyone: A Word of Caution

Online banking is not the best solution for everybody. If you get paid in cash, make frequent deposits and withdrawals, or have limited computer access, you may want to do your primary banking at an institution that has walk-in branches and plenty of ATMs for depositing checks.

But if you have a portion of your savings that you don't need to access as frequently, you can still take advantage of great online savings account rates, though. Just link your online savings account to your local bank checking account.

Start Saving Now

Once you've compared savings account interest rates, you can get the ball rolling with an online savings account. They're easy and quick to open. You can link your new savings account to your existing checking account and test drive the bank for a few months. Do those interest rates hold up? How's the customer service? Does the account meet your needs?

Once you're confident you like the bank you're dealing with, you can decide whether or not to make the switch with your checking account, too. Like regular banks, online banks often offer incentives for customers who bundle multiple accounts with them.

Online banking offers a wealth of advantages to savvy consumers. Great interest rates, low fees, and convenience all boost your savings and help you manage your bills. Do your homework to find the best savings rates, then dive in!