Online checking and savings accounts vary in features and yields

"Online banking" is a broad term that covers several different types of banks. It's important to remember that online checking and savings accounts offer variable interest. The interest rate can change overnight, and the trend is downward. Banks often offer an attractive interest rate until they accumulate the desired number of customers, then start to lower the yield.

There are two ways to specify the rate of return on money deposited in an account: the interest rate (usually compounded daily), and the annual percentage yield (APY). The APY is a bit higher, because the banks pay interest on the accumulated interest. Thus, money left in for an entire year earns the higher APY.

See our reports on personal finance sites and online bill paying for services that can track all of your financial accounts and help you manage bills. Personal finance sites and online bill paying can both help manage your assets and expenses.

Reviewers say the following about shopping for an online banking account:

  • Make sure your online bank is insured by the FDIC. Be sure you keep your deposits in each bank below the FDIC limit of $250,000 per bank. Also be sure you understand how the FDIC defines these limits when it comes to joint accounts, trusts and beneficiaries. Since banks with different names can actually be the same bank, experts recommend checking the FDIC bank ID numbers to be sure you're really using different banks.
  • You can also check the bank's ratings. BankRate.com provides ratings as of December 2011; ratings are meant to assess the institution's financial health, not customer service or interest rates. You can also check bank ratings at Bauer Financial, or call Veribanc for a bank rating by phone (*Est. $10) at Veribanc.
  • Consider your priorities. If you want to save for a specific purchase instead of incurring credit card debt, then the extra support provided by a savings program such as SmartyPig might be just the thing. If you want the highest interest rates on checking, consider a rewards checking account. If you travel a lot and need a nationwide ATM network, that convenience may matter more to you than higher interest rates.
  • Read the fine print and watch for fees. Though many online banking accounts don't carry fees, there may be extra charges for low balances or ATM use, so it pays to read the fine print. ATM and overdraft fees can add up fast. Watch, too, for restrictions on withdrawals and find out how long the bank takes to credit a deposit to your account.
  • Watch the teaser rates. Just about all online bank yields are variable. Interest rates can go up or down without notice, and some promotional rates could last just a few months.
  • Rates can differ between an online bank and its corporate parent. Experts say it pays to check out online accounts at your local bank, because the rates may be higher. BankRate.com publishes listings of the highest-paying accounts, and MoneyAisle.com, CheckingFinder.com and BankVibe.com, among others, also help locate high yields.
  • Think about how you want to make withdrawals. Online savings accounts usually don't issue checks, whereas money market accounts provide checks but restrict the number of withdrawals per month. If you plan to use ATMs, be sure to check availability in your area, plus any fees, daily limits and reimbursements available. Note that some ATMs are located in convenience stores, restaurants and even bars -- so be sure that the ATMs are located where you'll feel comfortable. If you plan to transfer funds from an online account to a local one, be sure you know how many days to allow for this.
  • Deposits can take longer at online banks. Because you might have to mail checks for deposits, you have to account for mailing time. Bank policies vary widely about how long it takes to make funds available after the bank receives a check. Direct deposits and bank transfers are faster, but a bank transfer may also take several days. Many online banks -- but not all -- offer remote deposit options via a home computer and/or a smart phone or tablet.
  • Be careful about the requirements for reward checking. These accounts offer the highest interest available (at the time of our report) but have stringent terms to meet. Be sure you understand what you need to do to get the interest and avoid fees, and that you can accept the risks of using a debit card.
  • Look for zero liability for unauthorized use. Not all online accounts come with a guarantee to reimburse users for any funds lost through unauthorized use.
  • Watch out for phishing scams. In scams such as phishing, you're asked to click on a link to reveal more about your banking account. If you do, you're open to having your assets stolen by revealing account numbers or passwords.
  • Be sure your own computer is safe. Experts say it's crucial to keep up to date with the security patches for your operating system and to keep current with good security software. ConsumerSearch has separate reports on anti-virus software, firewalls and Internet security software.
  • Be cautious about mobile banking. It's convenient to be able to do online banking from your cell phone or laptop, but security may be jeopardized at wireless hot spots. Be sure you understand wireless security and that your bank encrypts the transmissions.   

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