Saturday, February 14, 2009

Double Interest

It’s a favorite game of child mathematicians: offering to double something when the value in question is zero. If you are helping a child with something, they are all too happy to double, even triple, your pay, knowing that even after such a generous increase, they still won’t be paying you anything.

Now that interest rates are based on a reference rate of zero, this is a game that banks could be playing. In normal times, a bank couldn’t double the interest rate on your interest checking account or savings account even as a gimmick. There are rules from the FDIC and elsewhere that can limit how much interest a bank can pay. But when rates are based on zero, it becomes a possibility.

As an example, a bank could offer to double its usual interest for one day if you just check a box in its online banking portal. It might do that as an incentive for you to try out the online banking environment, and perhaps save the bank’s tellers some work if you can get a few of your transactions done online. The doubled interest rate sounds like a reason to take action, but it’s not really much at all. If you’re a typical interest checking account holder with a balance around $1,500 earning 0.86 percent interest, the interest you earn in a day is about 3 cents. Double interest would be about 6 cents. Don’t spend it all in one place!