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Consumers put trust in savings accounts

But it still pays to shop around for the best rate

By James Sullivan
Globe Correspondent / March 6, 2011

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The wild ups and downs of the stock market in recent years — particularly the downs — have led consumers to rethink investment strategies. For many, the place to put their money is the bank.

Old-fashioned savings accounts have become more popular with consumers, who, after seeing their 401(k)s wither in the 2008 stock market crash, have become willing to trade the promise of higher returns for the peace of mind of safety. At Industrial Credit Union in Boston, for example, overall deposits rose 17 percent, while the money put into higher-yielding certificates of deposit rose 28 percent, said chief executive Roy Campana.

“That’s the strongest indicator of the investment decisions being made by the general public,’’ he said. “It’s a definite statement that they want their principal protected, and they want a better-than-average rate of return if they can get it.’’

Getting a decent rate of return is a particular challenge for savers these days, when short-term interest rates are at or near historic lows. No matter what you do, you’re not going to do great, said Greg McBride, senior financial analyst at Bankrate.com, a personal finance website that tracks bank products and rates in markets around the country.

But you can still squeeze a little extra out of your savings, he said.

Start by shopping around. While rates in general are low, they can still vary widely — anywhere from 0.1 percent to 1.1 percent for a savings account. For example, the average rate for a bank money market account in the Boston area is 0.12 percent, according to Bankrate.com. Industrial Credit Union offers 0.85 percent on savings. Internet banks, such as ING Direct, offer 1 percent, sometimes a little bit better.

“The difference between earning 0.10 percent and 1.10 percent on a savings account might not sound like much now,’’ said McBride. “But not only are you scoring a better return today — the banks that pay the best returns now are also the ones that will be first to increase returns once interest rates start to rise.’’

Some banks also offer relatively high promotional rates to attract new accounts, but typically with several conditions. Danversbank in Danvers, for example, offers a 3.01 percent rate on its Free Rewards Checking. The rate, however, applies to only the first $25,000 in the account. It also requires the depositor make 12 debit card purchases a month, receive electronic statements, use its online banking system, and have paychecks or Social Security checks directly deposited.

Miss any one of these requirements during the month, and the rate drops to 0.25 percent for that month. The rate will return to 3.01 percent the following month if all the requirements are met.

“It is still one of the highest rates in the country, and we open accounts from people online throughout the country just to get that rate,’’ said Jim McCarthy, the bank’s chief operating officer.

Another way to boost returns is to invest in certificates of deposit, which pay higher rates but tie up money for a certain period. The longer the term of the CD, the higher the interest rate. For example, the average six-month CD in Boston pays annual rate of about 0.33 percent, according to Bankrate. com. Lock the money up in a three-year CD, and earn 1.29 percent. The average five-year CD will earn a little over 2 percent a year.

But with rates so low, and only likely to go up in the future, Bankrate’s McBride cautioned against buying CDs with terms longer than two years.

“You don’t want to get locked in at 2.5 percent for the next four years only to watch inflation and interest rates go racing right past you,’’ he said.

McBride also cautions risk-averse savers against long-term bonds and bond mutual funds for the much the same reason: They lock in relatively low rates that are likely to be surpassed over the next few years. The 10-year Treasury’s rate above 3 percent may look attractive now, but won’t as the economy strengthens, inflation picks up, and rates rise. In addition, the underlying value of bonds or bond funds decline when interest rates increase.

“You’re probably not even going to compensate for inflation over the next decade, much less taxes or an actual return on investment,’’ McBride said.

Globe Correspondent Allison Knothe contributed to this report.