Safety first: importance of bank ratings
Being aware of your current bank’s financial condition can be beneficial in these times. Bankrate.com uses a rating system that utilizes more than 20 tests to calculate asset quality, capital adequacy, liquidity and profitability of financial institutions. These factors can help identify safe, risk-averse banking options.
Consider these key factors when comparing bank ratings.
The star ratings range from 1, the lowest, to 5, which means superior. The top financial institutions will generally have at least a 3-star rating. Some banks may have below-average performance factors during the rating cycle that put them in the 1- or 2-star rating category; however, this does not necessarily mean regulatory action is forthcoming or even probable.
Ratings fluctuate and are updated quarterly. A low-rated bank doesn’t necessarily mean a poor choice. In fact, many people seek out these banks for the higher rates they often pay.
Generally, star ratings are more important to those with uninsured deposits than those with deposits insured by the Federal Deposit Insurance Corp., or FDIC, but knowing your bank’s current situation is important in today’s volatile economic climate.
You may be tempted to jump on a high-yield CD rate from a low-rated financial institution, but make sure first that your deposit is completely FDIC-insured through the life of the deposit. As long as your deposit is under $250,000, you would be covered should the bank fail.
However, it’s always wise to have cash in an FDIC-insured checking or savings account with a different institution, too, just in case it takes the FDIC longer than normal to recoup your money.
Generally, it’s important to do day-to-day banking with a financial institution with at least 3 stars, but there are upsides to working with lower-rated institutions as well. While these bank ratings aren’t guaranteed to predict the future of your institution’s well-being, they do provide helpful insight to its current financial condition.