Fixed Annuities: Maximize State Guaranty Coverage Limits

A recent article by Scott Burns talked about investing in deferred fixed annuities with CD-like qualities, an example offered a 3% yield guaranteed for 5 years plus no surrender charges (similar to early withdrawal penalty) after 5 years. This is a better rate than current bank CDs offer, and annuities can grow tax-deferred for those saving for retirement (withdraw as early as age 59.5)*. After the 5 years, you roll the annuity over to another company if the new rate is no longer good enough. The catch? The annuities that have the best rates often don’t have the highest credit ratings.

A possible solution? Make sure you stay under the coverage limits of your state’s Life & Health Guaranty Association. From NOHLGA.com:

State life and health insurance guaranty associations are state entities (in all 50 states as well as Puerto Rico and the District of Columbia) created to protect policyholders of an insolvent insurance company. All insurance companies (with limited exceptions) licensed to sell life or health insurance in a state must be members of that state’s guaranty association.

These are not federally-backed like FDIC insurance. Instead, all the member insurance companies agree to cover each other in cases of insolvency up to the policy limits. In order to be a licensed insurer, you need to maintain a certain level of financial stability. But just like banks, some insurers are stronger than others. So if you’re going to go over the limits, the standard advice is to go with a top credit rating from AM Best, Moody’s, or S&P. However, credit ratings can go down over time, and you may be holding these annuities for many years. Therefore, it’s still safest to stay under the limits.

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Savings I-Bonds May 2013 Upcoming Rate: 1.18%

New inflation numbers for March 2013 were just announced, so it’s time for the usual semi-annual update and rate predictions.

New Inflation Rate
September 2012 CPI-U was 231.407. March 2013 CPI-U was 232.773, for a semi-annual increase of 0.590%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be approximately 1.18%. The new fixed rate is nearly guaranteed to be zero, so the total rate will be 1.18% as well. If you have an older savings bond, your fixed rate may be different.

Purchase and Redemption Timing Reminder
You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time though, since if you wait too long your effective purchase date may be bumped into the next month.

Buying in April

If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.0%. You will be guaranteed the current variable interest rate of 1.76% for the next 6 months, for a total rate of 0 + 1.76 = 1.76%. For the 6 months after that, the total rate will be 0.0 + 1.18 = 1.18%. Let’s say we hold for the minimum of one year and pay the 3-month interest penalty. If you buy on April 30th and sell on April 1, 2013, you’ll earn a 1.28% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. This is better than any 1-year bank CD that I can find right now, keeping in mind the liquidity concerns and the purchase limits. If you hold for longer, you’ll be getting the full 1.47% over the first year.

Given the combination of current low rates and the fact that you lose the last 3 months of interest (again, for holding less than 5 years), it might be better to wait long enough to grab 12 full months of interest by holding for 15 months (14 buying late). If you buy on April 30th and hold until July 1st, 2014, you’d achieve a annualized return of ~1.26% over 14 months. After that, you can see what the new rates are and decide whether to keep holding them.

Buying in May

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Cash Reserves Update: Best Available Interest Rates – March 2013

Our family keeps a full year of expenses put aside in cash reserves; it provides us with financial stability with the additional side benefits of lower stress and less concern about stock market gyrations. Emergency funds can actually have a better return on investment than what you see on your bank statement.

I’ve been slacking in terms of updates on this topic. While I still like to maximize my interest, there just hasn’t been many new developments that make me want to jump from one bank from another. However, if you haven’t optimized your cash recently, you may be stuck in a money market fund or megabank saving account paying 0.05% or less. You can definitely still do better than that! Here are what I consider the highlights of the best currently available interest rates.

Certificates of Deposit

If you have a large cushion, it’s quite likely to just sit there for years or more. Therefore, you may wish to put some of it in longer-term investments where you can take the money out in a true emergency and paid an early withdrawal penalty.

  • Everbank’s Yield Pledge Money Market and Interest Checking account both offer 1.10% APY guaranteed for the first 6 months for new accounts. Since it is fixed, this is essentially a 6-month CD with a higher rate than any other 6-month CD rate out there and with no early withdrawal penalty to worry about.
  • Ally Bank Raise Your Rate CDs have a rate bump feature; the 2-year term pays 1.05% APY and the 4-year term pays 1.30% APY (as of 11/1/13). You can change your rate after your account is opened — if their rate on this CD goes up, yours can bump up to match it (one interest rate increase with the 2 year term, two interest rate increases with the 4 year term).They also offer traditional Ally Bank High-Yield CDs with 3-year CDs at 1.20% APY and 5-year CDs at 1.60% APY (as of 11/1/13) currently. Early withdrawal penalty is only 60 days.
  • Discover Bank CDs are currently offering 3-year CDs at 1.25% APY, 5-year CDs at 1.65% APY, 7-year CDs at 1.80% APY, and a 10-year CD at 1.90% APY. Early withdrawal penalty varies from 6 months for the 3-year to 15 months on the 7 and 10-year CD.
  • PenFed Credit Union CDs are currently offering 3-year CDs at 1.60% APY, 5-Year CDs at 1.65% APY, and a 7-Year CD at 1.75% APY. Early withdrawal penalty varies from 6 months for the 3-year CD to 12 months on the 5 and 7-year CD.

Ally Bank’s Flexible Certificates of Deposit

Ally Bank LogoLet’s focus on the Ally Bank certificates of deposit, where you can still access your money as long as you pay a early withdrawal penalty of 60 days interest – significantly less than at other banks. Why is this good?

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Best Value for Citi ThankYou Points Redemptions

If you have a Citi credit card or a Citibank account with the ThankYou points rewards system, you have a wide array of options to redeem your points at ThankYou.com. But while that fancy coffeemaker may look nice, chances are the cash equivalent value for your points is quite poor. I’ve covered this in bits and pieces before, but here’s a complete guide to getting the most value out of your points.

Eligible ThankYou accounts (* are the ones I have linked to my account):

  • Citibank Checking Accounts – Varies, historically 10,000 to 40,000 bonus ThankYou points for opening an account.
  • Citi ThankYou® Preferred Card – Earn up to 20,000 Bonus Points – Earn 20,000 bonus points after $1,500 in purchases in the first 3 months of account opening. No annual fee.
  • Citi ThankYou® Premier Card – 50,000 bonus ThankYou® Points, Travel redemption bonus, see application for details.
  • Citi ThankYou® Preferred Card for College Students – Earn 2,500 Bonus Points - 2,500 bonus ThankYou Points After you spend $500 in purchases within 3 months of account opening.
  • CitiBusiness ThankYou® Card* – 15,000 bonus ThankYou® Points after $3,000 in purchases within 3 months of account opening. 3X points in rotating categories. No annual fee.

Best Value Option #1: Limited Time Offers

If you have either patience or luck, Citi does offer “sales” on gift card redemptions which can reduce the cost of a reward by up to 25%. For example, right now until 3/31 you can get a $50 Home Depot gift card for 4,500 points. Normally, you’d need 5,000-6,000 points. That equates 1.11 cents in gift card value per point. If you wanted cash, you could sell a Home Depot gift card at PlasticJungle.com for 87% of face value in cash, 91.35% in Amazon.com gift certificates. That equates to 0.967 cents per point in cash.

Previously ThankYou point sales have involved gift card to other popular retailers like Wal-mart, Lowe’s, Kohl’s, Best Buy, Gap, and Macy’s. The regular price is usually 1 cent in gift card value per point.

Best Value Option #2: Student Loan & Mortgage Rebate Checks

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Capital One Consumer Bank Savings Account Review

Capital One bought ING Direct USA back in early 2012, and has finally completed their transition and re-branding. Their new savings account product is called Capital One Consumer Bank Savings. Since I’ve had an account with them for over a decade (September 2001, as they remind me every time I log in), here’s an updated review of my 2nd oldest bank account meant for both new and existing customers.

User Interface

At first glance, the only thing that really changed was that the primary colors went from orange and blue to Capital One’s red and blue. However, there are a few other tweaks that I noticed were different from the ole’ ING Direct days.

Login. This is still a little unique amongst online savings accounts. You login with either a username/account number and a PIN number (not an alphanumeric pA$sW0rd). If you have an old 4-digit PIN, they’ll ask you to change the PIN to a 6-digit number for better security. In addition, while the default entry method is via mouse clicks to avoid keystroke loggers stealing your password, you can also use a keyboard to enter the PIN with a creative key-to-number conversion that changes each time. See screenshot below:

Main account screen. The home screen is simple and straightforward, as always. There is better integration with their brokerage arm, Sharebuilder, with your balance automatically showing and the ability to perform same-day transfers between accounts. So if you have a Sharebuilder account, you essentially have a high-interest sweep option instead of a money market fund paying zero interest. Screenshot:
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Ally Bank Mobile eCheck Deposit via iPhone App

Ally Bank has updated their new mobile banking apps to add mobile check deposit and more. You can now do the following:

  • Mobile eCheck Deposit – Deposit a check just by snapping a picture of it with your camera phone.
  • Bill Pay – Pay your bills from your phone or tablet. Payees need to be set up on the website first.
  • Non-Ally Bank-to-Bank Transfers – Transfer money to and from your other banks for free. Very handy if you’re like me with many bank accounts.
  • Instant phone access. Tap a button on the app and it’ll call an Ally human by phone 24/7. The estimated wait time is even shown beforehand.
  • Built-in ATM locator with GPS. Not really needed much as I can use any ATM with their fee reimbursements. I did notice that the locator includes drugstores and grocery stores that offer cash back with purchase.

I’m glad these features are finally here, given that Ally is my everyday bank account and inter-bank transfer hub due to their lack of fees, competitive rates, and no-hassle ATM rebates. I also hold a chunk of my emergency fund in their 5-year CDs with no minimum opening amounts.

I tested out the mobile check deposit today, and overall it worked the same as other apps I’ve used. You can deposit into either a Ally checking or savings account. My eCheck deposit limit was $10,000 per day or $25,000 every 30 days, which is pretty high as these things go. Anything higher and you can still use the free postage-paid envelopes from Ally. After you take a picture of the front and back, they will send you an e-mail about your deposit status. My deposit was approved later the same day, and my $100 deposit was available the next business day for withdrawal (varies with size of deposit). They ask you to save your check for 60 days and then destroy it.

Apple iOS app (iPod Touch, iPad compatible), Android OS app.

ING Direct’s New Name: Capital One 360

ING Direct announced to customers last week that they would soon change their name to Capital One 360, effective February 2013. Goodbye big orange ball, you were the first no-frills savings account that paid high interest by piggybacking on regular checking accounts (no branches, no ATM access, no checks) and it worked brilliantly, creating an entire new banking niche. But the financial crisis happened, ING Group got a big Euro-bailout, and as part of the restructuring terms they agreed to sell their ING Direct unit for $9 billion dollars.

It was a fun ride, ING Direct. For a while, you paid me nearly 5% APY interest as I borrowed money for free using 0% APR balance transfers. Your website was unapologetically simple, but everything worked as promised. You created handy sub-accounts for savers to stash their money for specific needs. Good times. Of course, I can’t forget that you also had a nervous brainfart and bullied my webhosting company into shutting down my entire website without any warning. In the end, your interest rates also started to fade a little from the top while staying somewhat competitive, and being a rate-chaser I moved my money elsewhere. No hard feelings?

As is always the case, the new company promises to keep everything you loved about the old company, while also making additional improvements. I still keep about $100 with ING Direct to keep them from closing my account, mostly out of nostalgia I suppose. I’ll continue to wait and see how they integrate the site with the other recently-improved Capital One products like their 1.5% cash back personal cards and 2% cash back business cards. CapOne wants to join the big boys Chase/Citi/AmEx as a broad financial services company.

What are you planning to do with your ING Direct account?

Chase Total Checking Account Promotion – $150 Bonus

Chase Bank is offering a $150 bonus for new customers when you open a Chase Total Checking account plus deposit $100 and set up direct deposit within 60 days of account opening. You can avoid monthly service fees if you make a $500+ direct deposit each month or maintain a $1,500 minimum daily balance. Must keep account open for 6 months to keep the bonus. Expires 8/15/12.

At least in the past, you could simulate direct deposit using an ACH transfer from an online savings bank. Fine print quoted below.
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FNBO Direct Returning Customer Promo 1.35% APY

If you have a dormant FNBO Direct account, you may be interested to know that they are offering a promotional rate of 1.35% APY beginning July 1, 2012 on all the money above what your balance was on June 29th, 2012. (Only available to existing FNBO Direct customers as of June 29, 2012.) Even better, the rate is guaranteed until December 31, 2012, making it better than 6-month CDs from other banks. All rates above have expired and FNBO is now offering a standard rate of 0.85% APY.

I should probably move a little money over… see my June 2012 Emergency Fund update for where else I stash my cash. Also see my rate chaser calculator for some real-world estimates of how much extra interest you’d get.

FNBO Direct has become just another commodity online-savings account these days, so it’s good to see they’re trying to keep things at least a little interesting. I’d be a little annoyed if I kept a lot of money in there this whole time, though! The fine print from the e-mail I received is quoted below.

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CIT Bank CDs With Rising Rate Protection (Rate Hike Update)

Update: CIT Bank actually raised its rates on some of their CDs with a raise-your-rate feature. Rates updated in review below.

As a follow-up to my cash reserves post, I wanted to note that CIT Bank also has some very competitive rates on FDIC-insured CDs with added flexibility that makes them unique. They have a very simple website and appear to be focused on certificates of deposit, although they recently debuted a savings account with a 1.05% APY interest rate on balances above 25k.

Their Achiever CD has a current rate of 1.05% APY for 1-year term and 1.20% APY for the 2-year term with a $25,000 minimum opening deposit. The first unique feature is a “rate bump” option that allows to you raise your rate again in the future if the rate increases. The second unique feature is that you can add more money to your CD one time at any point you choose throughout the term.

You buy CDs to guarantee your rate won’t drop during the term. But these two features allow you added protection from rising rates in the future, and you already start with a competitive rate. You could match future rates, and move your other money over to match those rates as well. The primary limitation would be the higher minimum deposit requirement. Interest is compounded daily.

If you don’t have the $25,000 minimum, they also have their term CDs with a $1,000 minimum opening deposit. Those are paying 1.01% APY for 1-year term, 1.15% APY for 2-year, and 1.30% APY for 3-year. Those are nearly as good as the Achiever CD, but they don’t have the rate-bump and add-on features of the Achiever CD. The early withdrawal penalty is 3 months of interest for the 1-year CD, 6 months interest for the 2-year CD. A quick comparison table:

Name Term Minimum to open Interest rate Features
Achiever CD 1-year $25,000 1.05% APY One-time rate-bump, one-time add-on
Achiever CD 2-year $25,000 1.20% APY One-time rate-bump, one-time add-on
Term CD 6-months $1,000 0.45% APY Low minimum deposit
Term CD 1-year $1,000 1.01% APY Low minimum deposit
Term CD 2-year $1,000 1.15% APY Low minimum deposit
Term CD 3-year $1,000 1.30% APY Low minimum deposit

 

Prosper vs. LendingClub: Credit Card Debt Consolidation Loan Comparison

What is the best place to lower your interest rates and consolidate credit card debt in order to pay it all off? The first thing to try is to call up your credit card company and negotiate your existing rate down. If that isn’t satisfactory, you could switch issuers and do a balance transfer to a new card with a low introductory rate. If you have qualifying credit, you can take advantage of no fee 0% APR balance transfer offers for up to 15 months.

I would say the next option to consider is P2P lending, which in my experience has lower rates than personal unsecured loans from banks. P2P is gradually becoming an accepted source of loans as shown by announcements of new institutional money coming in from hedge funds. Prosper has been around since 2006 and has done over $300 million in loan volume since inception, and LendingClub has been around since 2007 with over $500 million in loans. Both are now registered with the SEC.

Prosper vs. LendingClub Similarities

  1. Unsecured loans. Such loans are backed only by the borrower’s promise. If there is a default, the lender can’t repossess any property or garnish wages. The primary deterrent to defaults is a poor credit score that will increase future borrowing costs and potentially other side effects including affecting employment.

    Alternatively, you may be considering paying off your credit card debt with a home equity loan. This would change your unsecured debt into a secured debt. The danger is now if you don’t pay off that loan, you could lose your house. If that added risk doesn’t make a difference to you, then a home equity loan or line of credit will probably offer you a lower rate.

  2. Flexible amounts. You can borrow more or less than your actual outstanding credit card balance, and you’re usually given a choice of amounts for the same interest rate. But remember, the purpose of consolidation is to help speed up the process of getting rid of that debt.
  3. Fixed rates over the entire term. The problem with credit cards is that the rates are often unpredictable. “Variable” rates are linked to a benchmark rate, but even “fixed” rates that aren’t guaranteed for X months can just mean they’re fixed until you get a notice that they are now “fixed” at a new, higher number. Given the current low interest rate environment, you should be wary of rising rates.
  4. No prepayment penalties. You can pay off your loan early at any time, with no fees.
  5. No application fee. There is no fee to apply for a loan. If your loan successfully funds and you get the cash, then you will be subject to an origination fee that is rolled into your monthly payments.

Prosper vs. LendingClub Differences

  1. Minimum credit scores. Prosper minimum stated credit score is 640, LendingClub minimum FICO score is 660.
  2. Maximum loan amounts. Prosper maximum loan amount is $25,000, LendingClub maximum loan amount is now $35,000. Both lower the limits depending on credit profile.
  3. Slightly different fee structures. Both companies charge an origination (closing) fee once you successfully get your loan. If you don’t get the loan, no fees. They have slightly different fee schedules, but both have origination fees ranging from about 1% to 5% for the majority of loans. Both charge $15 fees for late payments or failed payments.
  4. Different loan term lengths. Depending on your requested loan amount and other factors, each lender may offer different terms. For example, LendingClub told me that loan amounts from $1,000 to $15,975 are only available with a 36-month term, even though they do offer 1-year and 5-year loans in other cases. However, with a $10,000 loan at Prosper I was given the choice of 1, 3, or 5-year terms. In general, the longer the term, the higher the interest rate at both places.
  5. Check processing fees. LendingClub charges a $15 processing fee per payment made by check. Prosper does not. Both companies allow you to make payments via automatic ACH withdrawal from a checking account with no fees.

Prosper vs. LendingClub Interest Rates?

Their full criteria for determining what rate you’ll pay is not disclosed but is based on a number of factors. Really, the best way to see which one will give you the best deal is to ask each one for a free quote. In both cases, getting a rate quote will involve looking at your credit report, but it will not result in a credit inquiry and will not hurt your credit score. If you do decide to move forward and get the loan, only then it will show up on your credit report.

My experience. I applied for a $10,000 debt consolidation loan at both places. I was offered a 1-year loan at 8.17%, a 3-year loan at 7.49%, or a 5-year loan at 10.85% annual interest rates at Prosper. I was offered a 3-year loan at LendingClub at 6.62% interest rate. For a $10,000 loan over 3-years and including all fees, my LendingClub payment was $307 per month and Prosper payment was $311 per month. So even though the interest rates seem rather different, the final monthly payments ended up closer than expected (though still a $150 difference in total payments over the whole 3 years).

SunTrust Bank & Delta Check Card – 30,000 Bonus Miles Promotion

SunTrust Bank is offering 30,000 Delta Skymiles for opening a new checking account by 6/30 with qualifying direct deposit and choosing the Delta SkyMiles World Check Card. Available in AL, AR, FL, GA, MD, MS, NC, SC, TN, WV, VA and Washington, D.C. The debit card does have a $75 annual fee but do you get 1 mile per $1 spent (for those that avoid credit cards). However, you don’t get the free checked bags or Priority Boarding of the Delta American Express credit card.

Still it’s not a bad deal, $75 for 30k miles if you live near a SunTrust branch. Some of the text suggests that you can get 15k of those miles with just the new checking account and no debit card, but it’s not entirely clear. Direct deposit must be $100 or more. The “Balanced Banking” checking account option has a $12 monthly fee, waived with a $3,000 minimum balance across Suntrust accounts. Selected fine print below:

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