You should carefully consider closing your savings account early so you can reopen it when interest rates rise.
Reader Huyền Trân (Da Nang) asks: I currently have a savings account, but I’ve noticed that some banks have recently raised their deposit interest rates. Should I close my account early and reopen it to take advantage of the higher interest rate?
Answer:
Banking Times would like to thank you for your question. Here is our advice:
Before interest rates on deposits began to rise, many savers wondered whether they should close their accounts early and reopen them to take advantage of higher interest rates. However, this decision requires careful consideration, as it may not always be beneficial.
You may lose a significant portion of your interest
Under current regulations, when withdrawing savings deposits early, customers typically only receive the non-term interest rate on the amount withdrawn early, unless the bank has different provisions or allows for partial early withdrawals as agreed upon.
Meanwhile, the non-term deposit interest rate at many banks currently ranges from approximately 0.1 to 0.5 percent per year, which is significantly lower than the interest rate on term deposits. Therefore, if a depositor closes the account before the maturity date, they may lose a significant portion of the accumulated interest.
For example, a 12-month term deposit with an interest rate of 5.5 % per year that is withdrawn after 8 months may only earn the non-term deposit interest rate for the time the funds were held, resulting in a significant reduction in the actual interest received.
When should you consider closing the account early?
Closing a savings account early is only truly beneficial when the additional interest earned is sufficient to offset the interest lost due to early withdrawal. This usually only occurs if the deposit has very little time remaining until maturity or if interest rates have recently risen sharply.
Depositors should also familiarize themselves with the bank’s policies regarding early withdrawals. Currently, many banks offer a partial early withdrawal option, under which the withdrawn amount earns the non-term interest rate, while the remaining balance continues to earn the interest rate agreed upon for the term. This solution helps minimize interest losses if customers only need to use a portion of their funds.
For those planning long-term savings, experts recommend dividing the funds into multiple accounts with different terms or depositing in multiple installments (using a stepped-term approach). This approach not only provides access to funds when needed but also creates an opportunity to renew the account at a new interest rate without having to close the entire savings account.
In general, closing a savings account early solely to take advantage of a higher interest rate is not always the best option. Before making a decision, depositors should carefully calculate the interest lost from early withdrawal, the new interest rate they will receive, and the remaining term of the deposit to choose the option that provides the highest financial return.
