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Banks Win, People Lose: What Happens When Banks Raise Interest Rates

banks raise rates
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EDITOR'S NOTE: There’s an old line of trickery that goes like this: heads I win, tales you lose. True, you have to be pretty foolish to agree to such a wager, but it isn't all that different from the position banks put us in when the Federal Reserve raises rates: higher rates, banks win while borrowers and depositors lose. It’s particularly difficult for savers during higher periods of inflation because the little you receive in bank interest is eroded away by the cost of goods and services. So, why the lopsided benefits? The factors are generally the same, but the nuances in today’s fundamental environment are slightly different from times past. The Axios article explains the general situation; when banks typically raise interest rates; what banks are having to deal with now when making these decisions; and which banks are likely to be more competitive, however small the perks.

Data: Bankrate; Chart: Baidi Wang/Axios

Since the Fed started raising rates earlier this month, banks wasted little time pushing up the rates they charge credit card holders on their balances. But when it comes to the interest that folks earn on their savings accounts — those rates aren't budging much, Emily writes.

Why it matters: Time to play another round of "banks win, people lose." Financial institutions can earn more on credit card debt and regular folks can watch inflation erode their savings.

The big picture: "There typically is a lag between when banks raise interest rates on loans and other assets and when they raise rates on liabilities, particularly on retail checking and savings accounts," says Gary Schlossberg, global strategist at Wells Fargo Investment Institute.

  • Plus, right now the bigger banks don't really need your money, so they don't have much incentive to raise interest rates to attract more deposits, says Ted Rossman, an analyst at Bankrate.

At the same time, the number of people actually carrying a balance on their credit cards has declined, something executives keep mentioning on their earnings calls. So banks need to get more money from those who do have debt.

What's next: Online-only banks are the ones most likely to raise rates on bank accounts, Rossman says. "It's a form of advertising for them."

  • Online-only Comenity Direct is offering .75% APR on a savings account — the highest tracked by Bankrate, he adds.

Originally published on Axios.

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