We work hard for our money, so it’s a nice change of pace when our money works hard for us, which is what a tiered-rate savings account can do.
Putting cash into any kind of savings account can help money grow, not only by keeping it separate from where we do our spending but by earning interest. One option that can be pretty appealing is a tiered-rate savings account. The interest rate that a tiered-rate savings account earns usually grows as the amount of savings increases — which can make stashing away cash even more motivating.
Learn more here, including:
• What is a tiered interest rate?
• How do tiered-rate savings accounts work?
• What are the pros and cons of tiered-rate savings accounts?
• What are alternatives to tiered-rate savings accounts?
What Is a Tiered-Rate Savings Account?
A tiered-rate account is a savings account that has more than one potential interest rate that can be applied. Usually, the interest rate for a savings account doesn’t vary depending on the amount in the account, though it may change based on prevailing market conditions. (However, since the point of savings vs. checking accounts is to earn some interest, a fixed rate can be perfectly fine).
The way these tiered-rate accounts generally work is that as someone’s savings grow, so does their interest rate. Interest rates are offered on a tiered scale with the largest balances getting the highest interest rates. The interest rates offered by these accounts are known as tiered interest rates or escalating interest rates.
The point of this financial product is to encourage customers to save more money as they work towards earning the highest possible interest rate. It also helps keep account holders loyal to their current bank if they are wondering, “Do I need long-term savings?” With a tiered-rate account, the answer may be yes since customers are rewarding for their continued saving.
How Do Tiered-Rate Savings Accounts Work?
Here’s a closer look at how a tiered interest rate and tiered interest-rate accounts work. As briefly noted above, with a tiered-rate account, the higher someone’s balance is, the higher their interest rate is likely to be. That means, as their balance grows, their interest rate has the potential to rise. This can make a person’s savings grow more quickly.
Tiered-rate accounts offer account holders different “tiered” interest rates that correspond with different account balances. For example, if Acme Bank offers a tiered-rate savings account they may give a 0.01% interest rate for savings account amounts ranging from $10,000 to $25,000. For savings ranging from $25,000 to $100,000 they may up that interest rate to 0.02%.
Tiered-rate savings accounts tend to have a minimum balance threshold in order to open an account for the first time. Typically, a minimum daily balance must also be maintained. These accounts may also require that their holders make a minimum amount of monthly transactions (which could involve deposits or transferring money to another account). This transaction minimum may exist to ensure that the bank earns enough from transaction fees to profit even when paying out a higher interest rate.
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Characteristics of Tiered-Rate Accounts
The following characteristics are typically associated with tiered-rate accounts:
• Interest rates rise as account balances grow
• Minimum initial deposit and ongoing balance requirements
• Minimum monthly transaction requirements
Pros of Tiered-Rate Savings Accounts
These are a few advantages typically associated with tiered-rate savings accounts.
Opportunity to Earn Higher Interest Rate on Savings
Tiered-rate savings accounts tend to offer higher interest rates than normal savings accounts do — especially for motivated savers who work to increase their account balances. (Incidentally, as you think about opening a new account, you may wonder whether opening a savings account affects your credit score. It typically does not; banks don’t usually pull a credit report in order to approve you.)
Potential for Money to Increase Quicker
Because interest rates can be higher with tiered-rate savings accounts, it’s possible for savings held in these accounts to grow faster than with other accounts (as long as the account holder doesn’t remove money from the account, that is). Thanks to compound interest, your money will make more money.
Recommended: How Does Compounding Interest Grow Your Money?
Cons of Tiered-Rate Savings Accounts
As to be expected, there are also some disadvantages associated with tiered-rate savings accounts that are worth keeping in mind.
Putting Money Elsewhere Can Be Better to Build Wealth
Yes, a tiered-rate account does offer the opportunity to earn interest on savings and to grow those savings. However, the interest rates offered by these types of accounts tend to deliver a lower return vs. other investments (such as investing in the stock market). While investing in stocks is riskier than earning interest in an insured savings account, consumers can potentially see much greater growth that way. This can be helpful when saving for long-term goals like retirement.
Need a Larger Account Balance for the Highest Rates
To secure the best interest rates through a tiered-rate savings account, consumers may need a very large sum of money held in their savings account. If someone doesn’t have that amount of money, they may find that a standard savings account actually performs better for them. They might also research which common bank account bonuses they could snag by opening one of these regular accounts.
Here at a glance is a chart comparing the pros and cons of tiered-rate accounts:
| Pros of Tiered-Rate Accounts | Cons of Tiered-Rate Accounts |
|---|---|
| Opportunity to earn higher interest rates on savings | Putting money elsewhere can be better to build wealth |
| Potential for money to increase more quickly | Need a larger account balance for the highest rates |
Alternatives to Tiered-Rate Savings Accounts
If someone is looking to earn money on their savings, there are a few different vehicles they can consider for earning interest on their funds.
• High-yield savings accounts: High-yield savings accounts are similar to standard savings accounts, but they earn much higher interest rates. More often than not, high-yield savings accounts are found through online banks. These financial institutions can save big since they don’t have to finance bricks-and-mortar branch locations; they can pass along the savings to their customers in the form of higher interest rates, lower fees, and/or special bonuses.
• Money market accounts: Money market accounts are typically insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) like a savings account, so they are very secure. They tend to have a higher APY than a normal savings account. There is, however, a potential downside: Money markets may have significantly higher minimum deposit and balance requirements, and they can also have withdrawal limits much like some savings accounts do.
• Certificate of deposit: Certificates of deposit vs. savings accounts can be a wise choice for some consumers. Also known as CDs, certificates of deposit are time or term deposits, meaning the money stays in the account for a specific period of time (typically six months to a few years, though longer and shorter products are available). If you withdraw the funds before what is known as the maturity date, or the end of the term, you will likely pay a penalty fee. Because of the commitment to keep your money on deposit for a set length of time, CDs may offer higher interest rates than savings accounts and money market accounts.
The Takeaway
If someone has a chunk of money available to set aside, they may find that a tiered-rate savings account can be a good option. It offers them a way to earn a higher rate as they sock away more cash. If, however, someone is just starting their savings journey, a standard savings account with a single interest rate may work more in their favor. In all situations, the aspiring account holder needs to balance such variables as interest rate, minimum deposit and balance requirements, and account fees. By evaluating those factors, the right savings vehicle should come into focus.
Want to earn more interest on your savings? Check out what SoFi offers with Checking and Savings. When you open an online bank account with direct deposit, SoFi offers a competitive APY right off the bat, with no account fees (minimum balance, monthly, overdraft, or otherwise). Plus, you’ll have access to a network of 55,000+ fee-free ATMs.
FAQ
What is tiered APY?
Tiered-rate accounts offer account holders different “tiered” interest rates (which can be expressed as an APY, or annual percentage yield). The amount an account holder has on deposit will qualify them for a certain interest rate “tier” or level. Typically, the more money on deposit, the higher your rate.
What is tiering in banking?
Tiering in banking refers to tiered-savings accounts, which provide account holders with different interest rates based on their savings account’s balance. Usually, the higher someone’s account balance is, the higher their interest rate is.
Is a tiered interest rate good?
A tiered interest-rate structure tends to benefit savers who have high account balances since the more money you have on deposit, the higher your interest rate. If someone has a smaller amount of savings, a standard or high-yield savings account with a single interest rate may be more advantageous to them.
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SoFi members with direct deposit can earn up to 4.00% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 3/17/2023. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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