Banks pay between 0.01% and 5.35% APY on savings accounts, depending on the bank, the account type, and current Federal Reserve policy

The rate your bank offers is not fixed. It changes based on what the Federal Reserve does with its benchmark interest rate, which it adjusts several times a year. When the Fed raises rates, banks gradually raise what they pay depositors. When the Fed cuts rates, banks cut what they pay you — often faster than they raised it.

A traditional brick-and-mortar bank (Chase, Bank of America, Wells Fargo) typically pays 0.01% to 0.05% APY on a standard savings account. Online banks (Marcus, Ally, Wealthfront) and credit unions pay significantly more, often 4.5% to 5.35% APY on the same type of account. The difference is real money: on $10,000, you earn roughly $1 to $5 per year at a traditional bank, or $450 to $535 per year at an online bank.

The rate also depends on what you do with the account. Money market accounts sometimes pay slightly more than savings accounts. Certificates of Deposit (CDs) lock your money away for a set term — three months, one year, five years — and pay more in exchange. High-yield savings accounts are savings accounts that straightforward pay more than standard ones; they are not a different product, just a different rate tier.

Key Takeaways

  • Online banks and credit unions pay 4.5% to 5.35% APY on savings accounts, while traditional banks pay 0.01% to 0.05% APY for the same product.
  • The rate your bank pays changes when the Federal Reserve changes its benchmark rate, usually several times per year.
  • Banks can change the rate they pay you at any time and do not have to give advance notice, though most online banks notify customers when rates drop.
  • The APY shown on a bank's website is the rate new customers get; existing customers may see a different rate depending on the account age and balance.
  • Money market accounts and CDs often pay more than savings accounts because you either maintain a higher balance or lock your money away for a set period.

Why the same account pays different rates at different banks

Banks set their own rates within the constraints of what they can afford to pay. A bank's cost of funds — what it pays depositors — is one of its largest expenses. Banks that operate only online have lower overhead (no branches, fewer staff) and can afford to pay more. Banks with hundreds of physical branches have higher costs and pass less of the Fed's rate increases to savers.

Competition also matters. When many online banks offer 5% APY, a traditional bank offering 0.02% looks bad to anyone who bothers to compare. Some traditional banks raise their rates to compete; others do not, betting that most customers will not move their money. Credit unions, which are member-owned rather than shareholder-owned, often prioritize paying members more on deposits.

The size of your balance can affect your rate at some banks. A few institutions offer tiered rates: balances under $25,000 earn one rate, balances from $25,000 to $100,000 earn a higher rate, and so on. Most online banks do not tier; everyone gets the same rate regardless of balance.

How the Federal Reserve's decisions change what you earn

The Federal Reserve's benchmark rate — called the federal funds rate — is the interest rate at which banks lend money to each other overnight. It does not directly set what banks pay you, but it is the floor below which banks will not go. When the Fed raises its rate, banks have more incentive to raise what they pay depositors, because they can earn more by lending that money out. When the Fed cuts its rate, banks cut what they pay you.

The lag between a Fed decision and a change in your rate varies. Some online banks raise rates within days of a Fed increase. Traditional banks often wait weeks or months. When the Fed cuts rates, banks cut what they pay depositors much faster — sometimes within a week.

The Fed's rate decisions depend on inflation, employment, and economic growth. In 2022 and 2023, the Fed raised rates aggressively to fight inflation, and savings account rates climbed from near zero to 5% or higher at competitive banks. If inflation falls and the Fed begins cutting rates, those rates will fall again. The rates you see today are not permanent.

What APY means and how it differs from the stated interest rate

APY stands for Annual Percentage Yield. It is the total amount you earn in a year, including the effect of compounding — earning interest on your interest. A bank might compound interest daily, weekly, or monthly. The more often it compounds, the slightly more you earn.

For example, a savings account with a 5% APY compounded daily will earn you slightly more than one with a 5% APY compounded monthly, even though the stated rate is the same. The difference is small — usually less than 0.1% — but it adds up over time on large balances.

Banks must show you the APY, not just the interest rate, because APY is what you actually earn. When you see a rate advertised, it is always the APY unless the bank explicitly states otherwise (which is rare and usually a sign to look elsewhere).

How to find the highest rate for your situation

The highest rates are almost always at online banks and credit unions, not at traditional banks. If you want to maximize what you earn, compare rates across at least three to five institutions. Most banks publish their current rates on their websites; you do not have to call or visit a branch.

When comparing, check whether the rate applies to new customers only or to all customers. Some banks advertise a high rate for new accounts and pay existing customers less. Also check the minimum balance required to earn the advertised rate — a few banks require $25,000 or more to get their best rate.

If you have money in a traditional bank earning 0.01% APY and an online bank is offering 5% APY, moving your money costs nothing and takes a few days. You can keep your checking account where it is and move only your savings. The difference in earnings is substantial enough to be worth the effort.

When banks lower the rate they pay you

Banks can lower the rate on your savings account at any time. They do not have to give you advance notice, though most online banks send an email when rates drop. If you disagree with a rate cut, you can move your money to another bank; there is no penalty for withdrawing from a savings account.

Rate cuts happen most often when the Federal Reserve cuts its benchmark rate. They also happen when a bank decides it has enough deposits and does not need to compete as aggressively. During periods of economic uncertainty, some banks cut rates even when the Fed has not moved, straightforward to reduce their costs.

If you want to lock in a rate and protect yourself from cuts, a CD is the tool. When you open a CD, the bank guarantees that rate for the entire term — three months, one year, five years, whatever you choose. If rates fall, your CD rate stays the same. The tradeoff is that you cannot withdraw the money without paying a penalty (usually a few months of interest).

Money market accounts and CDs: when they pay more than savings accounts

A money market account is a hybrid between a savings account and a checking account. It usually requires a higher minimum balance — often $2,500 to $10,000 — and in exchange pays a higher rate than a standard savings account. Some money market accounts also come with a debit card or checks, though you are usually limited to a few withdrawals per month.

A Certificate of Deposit locks your money away for a set period. In exchange, the bank pays you a higher rate than a savings account. A three-month CD might pay 5.25% APY, while a savings account at the same bank pays 5.00% APY. A five-year CD might pay 5.50% APY. The longer you lock your money away, the more the bank usually pays.

The tradeoff is access. If you withdraw from a CD before the term ends, you pay an early withdrawal penalty, usually equal to a few months of interest. If you think you might need the money, a savings account is safer. If you know you will not touch the money for a year or more, a CD locks in a rate and protects you if rates fall.

Frequently Asked Questions

Why does my bank pay so much less than online banks?

Traditional banks have higher costs — branches, staff, physical infrastructure — and pass less of the Fed's rate increases to savers. Online banks have lower overhead and can afford to pay more. You are paying for convenience and brand recognition; the bank is not paying you for it.

If I move my money to an online bank, will I lose access to it?

No. Online banks are FDIC-insured just like traditional banks, and you can withdraw money anytime without penalty. Transfers between banks take one to three business days. You can keep your checking account at your current bank and move only your savings to earn a higher rate.

What happens to my rate if the Federal Reserve cuts interest rates?

Your rate will fall, usually within a few weeks. Banks cut what they pay depositors faster than they raise it. If you want to protect yourself, open a CD before the Fed cuts; the CD rate is locked in for the entire term, even if savings rates fall.

Is the rate shown on the bank's website the rate I will actually get?

Usually, yes — but check the fine print. Some banks advertise a rate for new customers only. Others require a minimum balance to earn the advertised rate. Read the terms before you open an account.

How much money do I need to earn a meaningful amount of interest?

At 5% APY, you earn $50 per year on $1,000, or $500 per year on $10,000. The math is straightforward: multiply your balance by the APY rate. Even small balances earn something, but the difference between 0.01% and 5% becomes noticeable once you have $5,000 or more.