Why Banks Will Soon Be Charging You Interest

Why Banks Will Soon Be Charging You Interest

You heard it here first: You’ll soon see negative interest rates on bank CDs, checking accounts and savings accounts.

Over the holidays, news broke that some of the country's biggest banks, like JPMorgan, Citigroup and Deutsche Bank, have been calling their biggest customers – huge corporations and pension funds – to have them take their cash deposits elsewhere. That's right: The banks don’t want the billions of dollars their biggest and best customers have given them.

“If you don't,” the banks threatened, “we're going to start charging you fees on those accounts.”

What's going on?

You've already noticed that you earn near-zero interest rates in your bank checking and savings accounts. Even though the bank pays you little to nothing, it still incurs costs to maintain your account. It sends you monthly statements, and processes your deposits and withdrawals.

Back in the days when interest rates were 5%, the banks could pay you 4%, and keep 1% as a profit. In that era, banks were happy to waive fees for their services. But these days, banks themselves aren't able to earn any interest on all those cash deposits. Yet, their costs persist in maintaining all these accounts.

And the bigger the account, the bigger the problem. That’s why banks have targeted their biggest customers first. When they’re done, it’s reasonable to assume they’ll move down the line to smaller, retail accounts.

That means you.

How low can interest rates go? If you think the answer is zero, think again. Interest rates can actually go below zero. Think that’s impossible? Well, they did in Japan more than 15 years ago, and they can do so here in the USA, too.

If you deposit $100,000, earn no interest but incur $100 in fees, that’s the equivalent of “earning” a -0.1% interest rate.

As financial advisors, we strongly encourage our clients to maintain cash reserves, to be used in case of financial emergency. We’ve always tolerated low interest rates as the cost for enjoying safety and ready availability of the funds whenever needed.

But it looks like that low return is about to get a lot lower, unless the Federal Reserve takes action soon to start raising interest rates. If you have a lot of money sitting in bank accounts, talk to us about your options. Call us at (888) PLAN-RIC or just click here to talk with a financial planner.