What you earn depends on the bank and the account type
The interest rate on a savings account is set by your bank, not by the government or a central authority. Different banks offer different rates, and the rate can change at any time. Right now, rates vary widely — some banks offer less than 0.01% annually, while others offer 4% or higher. The difference between these two is enormous over time, so where you keep your money matters.
The rate your bank pays you is called the Annual Percentage Yield, or APY. This is the percentage of your balance that the bank will add to your account over one year. If you have $1,000 in an account with a 4% APY, the bank will add roughly $40 to your account over twelve months (the exact amount depends on how often interest is calculated and added, which varies by bank).
Banks that operate only online — with no physical branches — tend to pay higher rates than banks with many locations. This is because online banks have lower costs to run. Traditional banks with branches in your neighborhood often pay lower rates, but they may offer other services that matter to you, like the ability to deposit cash or speak to someone in person.
Key Takeaways
- Banks set their own interest rates, so the same type of account pays different amounts at different banks.
- Online banks typically pay higher rates than branch banks because they have lower operating costs.
- The APY is the percentage of your balance the bank adds each year, and even small differences in rate add up significantly over time.
- Your bank can change the rate at any time, so a high rate today may not stay high tomorrow.
- Money market accounts and certificates of deposit often pay higher rates than regular savings accounts at the same bank.
How the rate you see advertised translates to actual dollars
Banks advertise their APY prominently because they know people shop around. When you see "4.50% APY" on a website, that is the annual rate. To figure out how much you will actually earn, multiply your balance by the APY as a decimal.
If you have $5,000 in an account with a 4.50% APY, you earn $5,000 × 0.045 = $225 per year. That is $18.75 per month on average. If the same $5,000 sits in an account with a 0.01% APY, you earn only $0.50 per year. Over five years, the difference between these two accounts is $1,125 — the higher-rate account earns that much more without you doing anything differently.
The longer your money sits untouched, the more the difference matters. This is because of compounding — the bank adds interest to your balance, and then in the next period, you earn interest on that interest too. Most banks compound interest daily, which means they calculate and add interest every single day. Some compound monthly or quarterly, which earns you slightly less.
Why rates change and what that means for you
Banks raise and lower their rates based on what the Federal Reserve does. The Federal Reserve is the central bank of the United States, and it sets a target range for interest rates that banks charge each other for short-term loans. When the Federal Reserve raises its target rate, banks usually raise the rates they pay on savings accounts. When the Federal Reserve lowers its target rate, banks usually lower savings rates too.
This means a rate that is high today may not be high in six months. If you open a savings account at a bank paying 4.50% APY, and six months later that bank drops the rate to 3.75% APY, your money will earn less going forward. The interest you already earned stays in your account, but new interest will be calculated at the lower rate.
You can move your money to a different bank if the rate drops and you find a better offer elsewhere. There is no penalty for closing a savings account and moving to another bank (though some banks charge a fee if you close an account within a certain time period, usually 30 to 90 days). Checking the rates at different banks once or twice a year is a straightforward way to make sure you are not leaving money on the table.
Regular savings accounts versus money market accounts and CDs
Within the same bank, different account types pay different rates. A money market account is a hybrid between a checking account and a savings account. It usually pays a higher rate than a regular savings account, but it may require a larger minimum balance and limits how many times per month you can withdraw money.
A certificate of deposit, or CD, is an account where you agree to leave your money untouched for a set period — usually three months, six months, one year, or five years. In exchange, the bank pays you a higher rate than a savings account. If you withdraw the money before the time period ends, you pay a penalty, usually a few months' worth of interest. CDs make sense if you know you will not need the money for a specific amount of time.
High-yield savings accounts are regular savings accounts at online banks that straightforward pay much higher rates than traditional banks. There is no catch — they are insured the same way, and you can withdraw your money anytime without penalty. The only trade-off is that you cannot walk into a branch or deposit cash in person.
How to compare rates across banks
To find the highest rate, you do not need to visit every bank's website. Websites like Bankrate, DepositAccounts, and the Federal Deposit Insurance Corporation (FDIC) website list current rates at many banks in one place. You can filter by account type and see which banks are paying the most.
When you compare, make sure you are looking at the APY, not the APR. APY includes the effect of compounding, while APR does not. For savings accounts, you always want to see the APY. Also check whether there are any fees — some banks charge monthly maintenance fees that eat into your interest earnings.
Once you find a bank with a rate you like, you can open an account online in minutes. You will need to provide your Social Security number, a government-issued ID, and proof of your address (a recent utility bill or bank statement works). The bank will verify this information and transfer funds from another account if you want to fund it right away.
What happens to your interest if the bank fails
Your savings account interest is protected by the Federal Deposit Insurance Corporation, or FDIC. If your bank fails, the FDIC insures up to $250,000 per account holder per bank. This means if you have $50,000 in a savings account and the bank goes under, you will get your $50,000 back plus all the interest you earned, up to the $250,000 limit.
This protection applies to all deposit accounts — savings accounts, checking accounts, money market accounts, and CDs. If you have more than $250,000 at one bank, you can open accounts in different names (like a joint account with a spouse) to increase your coverage, because each account type is insured separately.
Frequently Asked Questions
Can I move my money to a different bank if the rate drops?
Yes. You can close your account and move your money to another bank at any time with no penalty. Some banks charge a fee if you close within 30 to 90 days of opening, so check the account terms first. Your interest earnings stay with you — they are part of your balance.
Is the interest I earn taxable?
Yes. Interest earned in a savings account is considered income and is taxable. Your bank will send you a Form 1099-INT at the end of the year if you earned $10 or more in interest. You report this on your tax return. The higher the rate, the more tax you may owe, though the amount is usually small unless your balance is very large.
Why do online banks pay more interest than regular banks?
Online banks have lower costs because they do not maintain physical branches or employ tellers. They pass these savings on to customers by paying higher interest rates. You trade in-person service for a higher return on your money.
What is the difference between APY and APR?
APY includes the effect of compounding — interest earned on interest. APR does not. For savings accounts, APY is always the number you want to see because it shows what you will actually earn. APR is used more often for loans.
If I earn interest, does that count as income for government programs?
It depends on the program. Some need-based programs count all income, including interest. Others have income limits that do not include interest, or only count interest above a certain threshold. If you receive benefits, contact the program directly to ask how interest earnings affect your case.