Money invested in savings accounts grows as interest accumulates. Some accounts pay a flat rate of interest, no matter how much money is in the account. Tiered interest rate accounts offer a range of rates. These rates typically increase as the investor deposit enough money to reach different established tiers.
How Tiered Interest Rates Work
Each tier is typically a range of amounts. A savings deposit will initially earn interest at the rate given to the tier in which it falls; savers access the account's higher interest rates as their deposits increase and move up through the tiers. For example, an account may have two tiers of $0-1,000 and $1,001-5,000. An initial deposit of $500 earns the first tier interest rate. Once savings reach $1,001, the saver receives interest at the second tier rate.
Advantages of Tiered Interest Rates
Banks use tiered interest rates to encourage people to use their accounts and to save more money. Depositing money in a bank is essentially the same as giving it a loan, so it is in a bank's best business interest to encourage savers. People using these accounts benefit by getting access to a range of interest rates in a safe investment. Larger deposits or savings in a tiered rate account may earn more interest than in an account with a single fixed rate.
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Disadvantages of Tiered Interest Rates
The problem with tiered interest rates is that banks do not generally pay a very high return on savings, especially on the lower tiers of an account. Higher rates tend to be reserved for larger deposits, but large amounts of money may generate higher returns if invested elsewhere. Money withdrawn from an account may also affect the interest earned if the balance then moves down to a lower tier.