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As regular readers of the Dough Roller know, I use the Discover it card for daily purchases. It has no annual fee and you can earn up to 5% cash back. Actually, you can earn up to 20% cash back with some online retailers. What you might not know is that the Discover family of companies includes an online FDIC-insured bank. Called simply enough, Discover Bank offers some of the highest available interest rates on online savings and money market accounts. If you already carry a Discover credit card, there are some nice features that integrate your card with Discover Bank.
Discover Bank’s Products and Services
Discover Bank offers four account types: a money market account, an online savings account, certificates of deposit (CD), and an IRA CD. Each of these account types offers different interest rates and different access to your money.
Money Market Account
Discover Bank’s money market account is similar to an interest-bearing checking account with one exception: customers are limited to 6 pre-authorized withdrawals per statement cycle, including automatic or telephone transfers. Any withdrawals over the permitted 6 per statement cycle incur NO FEE. Now, you may be asking why Discover Bank imposed this limitation. The short answer is that it is required to under federal law.
I won’t dive into the details, but banking regulations prohibit banks from paying interest on certain transaction accounts. To comply with these laws, money market accounts are limited to six withdrawals per statement cycle. Most banks impose fees to curtail this limit but Discover recently changed its structure to attract more business … thus no fee. In short, all money market accounts have this limitation. In normal economic times, money market accounts typically pay higher interest rates than other demand accounts.
Setting up direct deposit into a money market account at Discover Bank has benefits. Customers can earn interest on their money immediately. And they still have access to the money with a debit card, check, or online transfer. An initial deposit of $2,500 is required to open a Discover Bank money market account. There are no fees associated with this account except for special services (e.g., wiring money, ordering checks).
Online Savings Account
While the Discover Bank online savings account is similar to the money market account, there are some important differences. First, the minimum required opening balance is $0. Second, the interest rate is generally higher. While both of these differences favor the online savings account, there is one important difference that favors the money market account–access to funds.
With the saving account, you withdraw money from your account through an online transfer to your checking account (wherever you bank), wire, or official bank check. You cannot write checks against the account or use a Discover debit card or credit card to gain access to your money. As with a money market account, you are limited to six pre-authorized withdrawals each statement cycle. So with the online savings account, you give up some methods to withdraw funds, but you gain a lower initial deposit and higher interest rate.
You can also set up automatic transfers from your existing checking or savings account. This is a useful way to automate your savings, whether to build up an emergency fund or to save for a future purchase.
Resource: Financial Freedom Calculator
CDs and IRA CDs
Discover Bank offers both a traditional certificate of deposit and an IRA CD designed specifically for retirement savings. The traditional CD is available with terms from 3 months to 10 years. With very competitive rates, Discover Bank makes it easy to accumulate interest that can be reinvested in the CD or transferred to another account. With the IRA CD, Discover Bank offers both the Roth and traditional IRA CDs. And you can rollover a 401(k) or transfer an IRA to Discover Bank. The interest rates for a given term are the same for both the CD and IRA CD products.
Both the CD and IRA CD offer what Discover Bank calls a “no penalty” feature. If you involuntarily lose your job, you can withdraw your funds penalty-free. There are limitations and restrictions on this feature. For example, it only applies to the 12-month CD or IRA CD. So be sure to review the terms on Discover Bank’s website.
Discover Bank’s Website and Customer Service
When you are dealing with an online bank, the website and customer service are critical. Having used the Discover website for a long time, I know first-hand that it is very easy to navigate. The Discover Bank site, while not as robust as the credit card site, is easy to use and offers a number of nice features.
First, Discover Bank offers 24-hour telephone customer support. Whether you have questions about a new or existing account, you can talk to a Discover Bank representative 24/7. Second, the Discover Bank website offers a number of useful financial calculators, including a savings calculator and a tool to forecast your retirement savings. Finally, Discover Bank offers money management tips and advice.
Pros and Cons
No monthly maintenance fees
High yield savings account
Multiple CD terms
Easy to use website
No bank branches