What it means
The bank sets a ladder of balance bands, and each band carries its own interest rate. A typical ladder might pay a low rate on the first few thousand dollars, a better rate on the next band, and the best rate once the balance passes a larger threshold.
The idea is to reward customers who keep more cash with the bank, because larger deposits are more useful for funding its lending. There are two ways the ladder can work, and they produce very different results.
In a "marginal" structure, each band's rate applies only to the dollars that fall inside that band, much like income tax brackets. In a "whole balance" structure, the rate for the highest band you reach applies to every dollar in the account.
For businesses, tiered accounts are a common home for idle operating cash. A finance team that keeps a large balance for payroll or tax payments can earn noticeably more than on a flat-rate account, as long as the balance reliably stays above the tier threshold.
If the balance dips below the line even for part of a month, the better rate may vanish for that period. The nuance that catches people out is that the advertised "up to" rate is usually only paid at the top tier.
A headline figure can be accurate and still misleading, because most customers never reach the top band. The honest comparison metric is the effective rate, which is the total interest actually earned divided by the average balance.
It is also worth checking how the balance is measured, because banks differ. Some use the daily closing balance, some use the average daily balance over the month, and some test the tier only on a single day.
Fees, minimum balance requirements and limits on withdrawals can also eat into the benefit of a higher tier.
In practice
Real-world examples.
Example
A small design agency keeps $75,000 of working cash in a savings account with three rate bands. The finance manager moves a further $30,000 of surplus cash into it from a current account paying nothing, pushing the balance into the top band. Over the year the extra interest covers the cost of the team's accounting software.
Example
A neighbourhood restaurant group holds a tiered business account where the better rate only applies if the balance stays above $25,000 all month. After a slow month in which payroll takes the balance to $22,000 for three days, the rate drops for the whole month. The owner starts keeping a buffer so that this does not happen again.
Example
A retired couple compare two bank offers on their $120,000 of savings. One advertises "up to" a high rate that applies only above $250,000, while the other pays a slightly lower flat rate on every dollar. Working out the effective rate on their actual balance shows the flat-rate account pays more.
Formula
Calculation
Marginal tier interest = sum of (amount of balance in each tier x that tier's annual rate)
Effective rate = total annual interest / total balance
Suppose an account pays 1% on the first $10,000, 2% on the next $40,000, and 3% on any balance above $50,000. A business keeps a steady $60,000 in the account for a year.
First tier: 10,000 x 1% = $100.
Second tier: 40,000 x 2% = $800.
Third tier: (60,000 - 50,000) = 10,000 x 3% = $300.
Total interest = 100 + 800 + 300 = $1,200, so the effective rate is 1,200 / 60,000 = 2.0%.
If the same account used the whole balance method, all $60,000 would earn 3%, which is 60,000 x 3% = $1,800. The gap of $600 shows why you must read the small print.Case study
Seen in the real world.
Harbourline Components is an illustrative, fictional manufacturer that keeps around $400,000 of cash between supplier payment runs. The finance director had always parked it in a current account that paid no interest, because it was simple and always available.
She asked the bank for a tiered savings account with three bands and modelled it using the lowest balance in each month rather than the average, since that was how the bank tested the tiers. On that basis the effective rate was about 2.5%, worth roughly $10,000 a year on $400,000 of cash.
The illustrative lesson is that the modelling mattered more than the headline rate. By keeping a firm buffer above the top threshold and sweeping only true surplus into the account, Harbourline earned the better rate in every month and still met every payment date.
Watch out
Common mistakes.
- Assuming the top-tier rate applies to every dollar, when many accounts apply each rate only to the slice of money within that band.
- Comparing accounts using the "up to" headline rate instead of the effective rate on your own typical balance.
- Letting the balance dip below a tier threshold, even briefly, without checking how the bank tests the balance.
Questions
People also ask.
What is the difference between marginal and whole balance tiering?
In a marginal structure each rate applies only to the portion of the balance inside its band, while in a whole balance structure the rate for the highest band you reach applies to every dollar.
How do I work out which account is better?
Calculate the total interest each account would pay on your normal balance for a year, then divide by that balance to get the effective rate and compare the results.
Are tiered rates fixed?
Not usually, because most banks can change the rate on each tier when market interest rates move, so the ladder itself can shift over time.
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