Basic savings accounts are a common and important way for Americans to stockpile for a rainy day, but savers should watch out for traps such as dormancy fees and unusually strict limits on withdrawals, according to a new report from the Consumer Federation of America.
The Washington, D.C.-based advocacy group said nearly half of all families and roughly one-third of low- and moderate-income households have traditional statement or passbook savings accounts that typically require a low minimum balance and, like other federally insured deposits, are paying miniscule interest rates.
"There's very little most consumers can do about low interest rates. What's important is to save regularly" to avoid turning to payday loans or running up big credit card balances to pay for car repairs, medical bills and other unforeseen expenses, the federation's executive director Stephen Brobeck told reporters in a conference call Monday.
Although federal regulations allow up to six withdrawals per month from savings accounts, some of the 150 banks reviewed in the report allowed fewer withdrawals, after which they charged a fee, the consumer group said.
"Limiting withdrawals to only one or two a month greatly limits the effectiveness of a savings account as an emergency fund," Mr. Brobeck said.
Consumers also should look out for excessive dormancy fees on inactive accounts. While most banks charge dormancy fees sparingly -- such as only after an account is inactive for one to three years and only on low balances -- the group identified some that charged fees after just six months.
Overall, big banks were more likely than smaller ones to require higher minimum balances on savings accounts and to charge higher fees for falling below the minimum, the study found.
On the other hand, big banks were more likely to disclose fees and interest rates on their websites.
Mr. Brobeck said the federation was surprised to find that half of the banks did not disclose interest rates or yields on their websites while 20 percent did not disclose monthly fees.
Compared to banks, credit unions tended to require lower minimum balances to avoid fees, charged lower fees and paid higher interest rates, although the study only reviewed accounts at the nation's 10 largest credit unions.
The report found only 4 percent of banks were paying more than 0.25 percent annual interest, equal to a return of $2.50 on a $1,000 balance. Seventeen percent were paying 0.01 percent or less, or no more than 10 cents on a $1,000 balance.
Among the much smaller sample of credit unions, rates also generally were low, averaging below 1 percent.
The consumer group urged regulators to crack down on unfair bank practices. And it called on banks, regulators and Congress to come up with ways to better incentivize low- and moderate-income families to save.
The study also found the biggest banks were the most likely to offer innovative accounts and savings incentives, such as cash bonuses or higher interest rates for customers authorizing automatic monthly transfers from checking to savings, inducements that the group commended.
As one idea to boost savings among lower income households, the consumer group advocated publicly funded subsidies. "If the federal government paid 3 percent [interest] on all statement savings on deposits up to $500 ... it would cost only several hundred million dollars -- a small fraction of upper-income tax breaks," Mr. Brobeck said.
"If there were significant tax reform, this is one modest way some of the imbalances could be addressed."
Patricia Sabatini: firstname.lastname@example.org or 412-263-3066.