Looking For A Place to Save: Economic times are pushing the rates of return very low

It doesn't pay much to save these days even as consumers and companies -- sobered by high unemployment and the recession -- have cut spending and tried to reduce debt.

The average regular savings account is providing a 0.21 percent interest rate, according to a national survey by Bankrate.com. Money-market deposit accounts, which are not backed by the Federal Deposit Insurance Corp., are paying a 0.19 percent interest rate.

Some regular savings accounts at local financial institutions are paying even less, as low as 0.05 percent. That is, if they advertise a rate at all on their websites. With interest rates so low, it doesn't take much for customers to find themselves paying their financial institution to hold their money for them.

For customers who allow their savings account balances to dip below a minimum level -- about $300 at the majority of local banks and credit unions -- there are monthly or quarterly fees that range from $5 to $25. There also are fees for exceeding a withdrawal limit.

All of which is why fewer chuckles are being heard when people say they are going to stick their money in their mattress.

Higher rates are available based on meeting higher minimum account or balance requirements, or with online accounts aimed at countering Internet-based competition.

Still, many of those accounts don't even reach 1 percent.

"I'm getting a whopping 0.2 percent on my savings account right now," said Tony Plath, a finance professor at UNC Charlotte. "In 20 years, with monthly compounding, of course, I can turn a $100 investment into $104.08.

"That's not even enough of a financial return to pay for the gas I need to drive to the bank to make the $100 deposit in the first place."

Supply and demand

The reason why interest rates on savings and money-market accounts have dropped so low comes down essentially to supply and demand, analysts and financial officials say.

Although some large banks, such as Bank of America Corp. and Wells Fargo & Co., make as much revenue off fees as loans, most financial institutions are dependent on loans for their profit.

Since the financial crisis began in 2008, most banks and credit unions' bottom lines have been weighed down by bad personal and commercial loans, often leading to foreclosure and defaults.

So even though banks and credit unions say they are "open for business" in terms of loans, analysts say they are so focused on low-risk loans and borrowers, and purging their loan portfolios of toxic loans, that credit remains tight.

For example, the Office of the Comptroller of the Currency reported last week that the trend of tightening underwriting standards is only now starting to loosen.

"That's good for credit markets as long as bankers remember to stick to sound underwriting principals and do not compromise standards because of competitive pressures or the assumption that loans will be sold to third parties," said Dave Wilson, the deputy comptroller for credit and market risk for the federal agency.

Meanwhile, many consumers are leery of stretching themselves financially for a new car or home, even with mortgage rates hitting historic lows seemingly every week recently.

Instead, what they want are short-term loans to help them bridge the financial gap long enough to find a new job or keep their home from foreclosure.

"Demand for loans is at an all-time low, so rates are down because demand is down," said Jeff Clark, the president of Southern Community Financial Corp.

"I don't see loan demand climbing the rest of the year because of the economy," Clark said.

The Southern account with the best interest rate compared with balance requirement is its Maximum Earnings checking account, which has a 2.96 percent interest rate for customers who have up to $25,000 in the account.

Allegacy Federal Credit Union has a 2.48 percent rate for a similar account. Wachovia Corp.'s Way2Save offers a 5.1 percent interest rate for the first year before it drops drastically the next year.

For the high-interest checking accounts, customers have to agree to certain electronic-banking qualifications that can include one automatic or direct-deposit transaction a month, at least 10 debit-card transactions for each statement cycle, willingness to receive bank statements by e-mail, and access online banking at least once a month.

As comparatively high as the ME account is now, the interest rate is half of what it was in March 2008 when Southern and Allegacy were scrapping for local deposits.

True savers

Another factor is that the Federal Reserve's low interest rates have allowed banks to reduce their deposit costs. The Fed paid nearly $4.4 billion in interest on transaction, savings and money-market deposit accounts in the first quarter, a decline of 74 percent from the first quarter of 2007, according to SNL Financial.

In response to tighter regulation on service-charge and credit-card fees, most financial institutions are requiring customers to agree to certain products and requirements, such as automatic deposits and minimum account balances, to have monthly fees waived.

"You're seeing minimum-balance requirements that pay a very low rate of interest so that lost customer interest can subsidize the delivery of a free checking account," Plath said.

Greg McBride, a senior financial analyst at Bankrate.com, said that most customers should not find themselves paying their bank to hold their money.

"It's more a factor of sloppy financial habits that are requiring people to pay service fees," McBride said. "True savers are going to make sure their money works for them regardless of the economic times."

rcraver@wsjournal.com | 727-7376

Bloomberg News contributed to this report.