Banks pay you interest on savings accounts, but almost nothing on checking accounts

The amount a bank pays you depends on the account type and the interest rate it offers. Savings accounts typically earn between 0.01% and 5.35% annual percentage yield (APY), depending on the bank and current market conditions. Checking accounts almost never earn interest—most pay 0.00% to 0.01% APY. Money market accounts and certificates of deposit (CDs) may pay more, but your money is less accessible.

The rate you receive is set by the bank, not by you. Banks decide their rates based on what the Federal Reserve charges them to borrow money. When the Fed raises its benchmark rate, banks eventually raise what they pay depositors. When the Fed cuts rates, banks cut what they pay you. The lag between a Fed move and a bank's response can be weeks or months.

Your balance matters too. Some banks pay higher rates only on balances above a certain threshold—say, $25,000 or $100,000. Others tiered accounts where the first $10,000 earns one rate and anything above that earns a different rate. Read the account terms to see whether your balance qualifies for the advertised rate.

Key Takeaways

  • Savings account rates range from 0.01% to 5.35% APY depending on the bank, while checking accounts typically earn nothing.
  • Banks set their rates based on Federal Reserve policy, so rates rise and fall with broader economic conditions.
  • Some banks pay higher rates only on balances above a minimum threshold, so confirm your balance qualifies for the advertised rate.
  • Online banks and credit unions often pay more than traditional brick-and-mortar banks because they have lower overhead costs.
  • The interest you earn is taxable income and will appear on a 1099-INT form if you earn $10 or more in a calendar year.

How interest rates differ by account type

Savings accounts are designed to hold money you don't need when ready. Banks typically pay 4.00% to 5.35% APY on savings accounts right now, though this varies by institution. High-yield savings accounts (HYSAs) at online banks tend to pay the highest rates because they don't maintain physical branches. Traditional banks with local branches usually pay less—sometimes 0.01% to 0.50% APY.

Checking accounts are meant for frequent deposits and withdrawals. Because you can access your money when ready, banks pay almost nothing—usually 0.00% to 0.01% APY. A few banks and credit unions offer checking accounts with slightly higher rates (0.25% to 1.00% APY), but these often come with conditions like a minimum balance, direct deposit requirement, or a cap on how many transactions you can make per month.

Money market accounts sit between savings and checking. They let you write checks or use a debit card, but they pay interest like a savings account. Rates typically range from 4.00% to 5.00% APY. CDs lock your money away for a set period—three months, one year, five years—in exchange for a may provide rate. CD rates are currently 4.50% to 5.50% APY depending on the term, and they don't fluctuate once you open the account.

Why online banks pay more than traditional banks

Online banks can afford to pay higher interest rates because they don't operate physical locations. They have no branch staff, no real estate costs, and no ATM networks to maintain. Those savings get passed to depositors as higher rates. An online bank might pay 5.35% APY on a savings account while a traditional bank down the street pays 0.10% on the same type of account.

The trade-off is convenience. Online banks have no tellers, no in-person customer service, and limited ways to deposit cash. If you need to deposit checks or cash regularly, or if you prefer talking to someone in person, a traditional bank may be worth the lower rate. If you mainly use direct deposit and online transfers, an online bank's higher rate usually makes more financial sense.

Credit unions also tend to pay competitive rates because they are member-owned cooperatives, not profit-driven corporations. They often pay slightly more than traditional banks but slightly less than online banks. Credit union rates vary widely depending on the institution, so it's worth checking what your local credit union offers.

How the Federal Reserve affects what you earn

The Federal Reserve sets a benchmark interest rate that influences what banks pay on deposits. When the Fed raises its rate, banks eventually raise the rates they offer on savings accounts and CDs. When the Fed cuts its rate, banks cut what they pay you. This relationship is not when ready—banks may wait weeks or months to adjust their rates, and they don't always move in lockstep.

The Fed raised rates aggressively from March 2022 through July 2023, which is why savings account rates climbed from near 0% to 5%+. If the Fed cuts rates in the future, expect savings rates to fall. Banks are usually faster to cut rates than to raise them, so savers often lose ground more quickly than they gain it.

You can track the Fed's current rate on the Federal Reserve's website. Major financial news outlets also report when the Fed meets and what it decides. If you want to lock in a high rate before it falls, CDs are a good option because the rate is may provide for the entire term.

Minimum balances and tiered rate structures

Many banks advertise a high APY but only pay it on balances above a certain amount. A bank might advertise 5.00% APY but only on balances of $100,000 or more. Balances below that threshold might earn 0.50% APY. Always read the account terms to see what rate applies to your balance.

Some accounts use tiered rates, where different portions of your balance earn different rates. For example, a bank might pay 5.00% APY on the first $50,000 and 4.50% APY on anything above that. The more you have, the lower your blended rate becomes. This is less common than a straightforward minimum-balance requirement, but it does exist.

A few banks require you to maintain a minimum balance to earn any interest at all. If your balance falls below the minimum, you earn 0% APY until you bring it back up. Check whether the bank you're considering has this rule before you open an account.

How interest is calculated and taxed

Banks calculate interest daily based on your balance and the APY, then deposit it into your account monthly or quarterly. The exact frequency varies by bank. If you have $10,000 in a savings account earning 5.00% APY, you earn roughly $50 per month (though the actual amount depends on the number of days in the month and how the bank compounds interest).

Interest income is taxable. If you earn $10 or more in interest during a calendar year, the bank will send you a Form 1099-INT by January 31 of the following year. You must report this income on your tax return. The interest is taxed at your ordinary income tax rate, which is usually higher than the capital gains rate.

If you have multiple accounts at different banks, each bank reports its own interest separately. You add them all together when you file your taxes. If you earn less than $10 total from all accounts in a year, you still owe tax on it, but the bank won't send a 1099-INT.

Comparing rates across banks

Interest rates change frequently, so the best rate today may not be the best rate next month. Websites like Bankrate, DepositAccounts, and the Federal Deposit Insurance Corporation (FDIC) list current rates at major banks and credit unions. You can filter by account type and see which institutions pay the most.

When comparing rates, look at the APY, not just the interest rate. APY accounts for how often interest is compounded, so it gives you a true picture of what you'll earn. A bank advertising 5.00% APY will earn you more than one advertising 4.95% APY, all else being equal.

Also check whether the bank has any fees that would eat into your earnings. Some banks charge monthly maintenance fees, overdraft fees, or fees for falling below a minimum balance. A high interest rate doesn't help if you're paying $10 per month in fees. Look for banks with no monthly fees and no minimum balance requirements.

Frequently Asked Questions

Can I move my money to a different bank if rates go down?

Yes. You can close your account and move your money to a bank offering a higher rate at any time. There is no penalty for switching banks. If you have a CD, you can withdraw early, but you'll usually pay an early withdrawal penalty equal to a few months of interest. Once the CD matures, you can move the money without penalty.

What happens to my interest if I withdraw money mid-month?

Most banks calculate interest based on your daily balance, so if you withdraw money partway through the month, you earn interest only on the balance you held. If you had $10,000 for 15 days and $5,000 for 15 days, you earn interest on roughly $7,500 for the month. The exact calculation depends on the bank's method.

Is my money safe if the bank fails?

Yes, up to $250,000 per account type per bank. The FDIC insures deposits at member banks, so if a bank fails, you get your money back. Savings accounts, checking accounts, and money market accounts are each insured separately, so you could have $250,000 in each and be fully covered. CDs are also FDIC-insured.

Do I have to report interest income if I earn less than $10?

You owe tax on all interest income, even if it's less than $10. However, the bank won't send you a 1099-INT unless you earn $10 or more. If you earn $5 in interest, you still report it on your tax return, but you'll have to track it yourself.

Can I earn interest on a checking account?

Most checking accounts earn 0% APY, but some banks and credit unions offer checking accounts with interest rates between 0.25% and 1.00% APY. These usually come with conditions like a minimum balance, direct deposit requirement, or a limit on withdrawals. Compare the interest earned against any fees to see if it's worth it.