What banks pay you depends on the account type and the rate they set

Banks pay you interest on money you keep in savings accounts, money market accounts, and some checking accounts. The amount varies widely—from nearly nothing to over 5% per year, depending on which bank you use and what type of account you open. A bank sets its own rate, and that rate can change at any time, so what you earn this month may not be what you earn next month.

The rate a bank offers is usually tied to the federal funds rate, which the Federal Reserve sets. When the Fed raises rates, banks tend to raise what they pay depositors. When the Fed cuts rates, banks usually cut what they pay you. But banks do not have to match the Fed's moves exactly—some banks pay much more than others even when rates are the same across the country.

The money you deposit is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account type at each bank. This means if the bank fails, you get your money back. The FDIC insurance does not affect how much interest the bank pays you, but it does protect what you have.

Key Takeaways

  • Banks set their own interest rates on savings and checking accounts, and those rates change based on what the Federal Reserve does and what other banks offer.
  • High-yield savings accounts at online banks currently pay between 4% and 5.5% annually, while traditional brick-and-mortar banks often pay less than 0.5%.
  • The interest rate you see advertised is the annual percentage yield (APY), which includes the effect of compounding—how often the bank adds interest to your balance.
  • Your deposits are protected by FDIC insurance up to $250,000 per account type, regardless of how much or how little interest the bank pays.
  • You can compare rates across banks online before opening an account, and you can move your money to a different bank if another one offers a better rate.

How to read the interest rate a bank advertises

Banks advertise an annual percentage yield (APY), not just a straightforward interest rate. The APY tells you what you will earn in a year if you leave the money untouched and the rate does not change. It includes the effect of compounding—the bank adding interest to your balance, and then paying you interest on that interest.

For example, if a bank advertises 5% APY on a savings account and you deposit $1,000, you will have roughly $1,050 after one year (the exact amount depends on how often the bank compounds interest, usually daily or monthly). If you leave that $1,050 in the account for another year at the same rate, you will earn interest on the full $1,050, not just the original $1,000.

The APY is what matters when you compare banks. A bank that advertises "5% APY" will pay you more than a bank advertising "4.9% APY" on the same deposit, all else equal. The difference sounds small, but on $10,000 over a year, that 0.1% difference is about $10.

Why different banks pay different amounts

Online banks and credit unions often pay more than traditional banks with physical branches. An online bank has lower costs—no tellers, no rent on a building—so it can afford to pay depositors more. A traditional bank with many branches has higher costs and often pays less.

Banks also compete for deposits. When one bank raises its rate, others may follow to keep customers from moving their money. During periods when the Fed is raising rates, you may see banks increase what they pay every few weeks. During periods when the Fed is cutting rates, banks may cut what they pay you more slowly than they cut what they charge borrowers.

The size of your deposit does not usually change the rate you receive. A bank pays the same APY to someone with $500 and someone with $50,000 in the same account type. However, some banks offer higher rates if you maintain a minimum balance or set up direct deposit.

How often banks add interest to your account

Banks compound interest at different intervals—daily, weekly, monthly, or quarterly. Daily compounding is most common and works in your favor because you earn interest on your interest more frequently. The difference between daily and monthly compounding is small on most balances, but it adds up over time.

The APY already accounts for compounding frequency, so you do not need to calculate it yourself. A bank that advertises 5% APY with daily compounding will pay you the same total amount as a bank advertising 5% APY with monthly compounding, assuming the same deposit and time period.

Interest usually posts to your account monthly, even if it compounds daily. You can see the interest added to your balance when you check your account online or receive your statement. Some banks show you a running total of interest earned year-to-date.

What happens when the Federal Reserve changes rates

The Federal Reserve does not set the rate banks pay you directly. Instead, it sets the federal funds rate, which is the rate banks charge each other for overnight loans. Banks use this as a benchmark when deciding what to pay depositors and what to charge borrowers.

When the Fed raises rates, banks usually raise what they pay on savings accounts within days or weeks. When the Fed cuts rates, banks often cut what they pay more slowly—sometimes taking months to lower rates on savings accounts, even though they lower rates on loans quickly.

You can track the Fed's rate decisions on the Federal Reserve's website. The Fed typically meets eight times per year to decide whether to raise, lower, or hold rates steady. If you are shopping for a savings account, checking what the Fed is expected to do in the coming months can help you decide whether to lock in a rate now or wait.

Comparing rates across banks before you open an account

You can see what different banks are currently paying by visiting their websites or using rate comparison sites that track APY across multiple banks. Write down the APY, the compounding frequency, and any minimum balance requirements. Some banks advertise a high rate but only for the first few months, then drop the rate—read the fine print.

When you find a bank offering a rate you like, you can open an account online in most cases. You will need to provide your name, address, Social Security number, and a way to fund the account (usually a transfer from another bank or a check deposit). The account usually opens within one to three business days.

You do not have to stay with one bank forever. If another bank raises its rate and you want to move your money, you can transfer it to the new bank. There is no penalty for moving your deposits, though some banks charge a fee if you close the account within a certain time period (usually 90 to 180 days). Check the account terms before you open.

What you should know about promotional rates

Some banks offer a higher rate for a limited time to attract new customers. For example, a bank might advertise 5.5% APY for the first three months, then drop to 4.5% APY after that. The promotional rate applies only to new accounts, and only if you meet certain conditions—like setting up direct deposit or maintaining a minimum balance.

Promotional rates are real money, but they do not last. If you are moving your savings to take advantage of a promotional rate, plan for what you will do when the rate drops. You can move your money again to another bank offering a promotion, or you can accept the lower rate if the bank is otherwise convenient.

Read the terms carefully before opening an account with a promotional rate. Some banks require you to keep the account open for a certain period or maintain a minimum balance, or the promotion is forfeited. Others explore the promotional rate only to deposits made during the promotional period, not to money you transfer in later.

Frequently Asked Questions

Do I pay taxes on the interest a bank pays me?

Yes. Interest income is taxable as ordinary income. At the end of each year, your bank sends you a Form 1099-INT showing how much interest you earned. You report this on your tax return. The amount of tax you owe depends on your tax bracket and total income.

Can a bank lower my interest rate without warning?

Yes. Banks can change the rate they pay on savings accounts at any time. They usually notify you before the change takes effect, but they are not required to give you advance notice. If a bank lowers its rate and you do not like it, you can move your money to another bank.

What is the difference between APY and APR?

APY (annual percentage yield) is what banks pay you on deposits and includes compounding. APR (annual percentage rate) is what you pay on loans and does not include compounding. When comparing savings accounts, look at APY. When comparing loans, look at APR.

Why do some checking accounts pay interest?

Some checking accounts pay a small amount of interest, usually much less than savings accounts. Banks offer interest-bearing checking accounts to attract customers who want to keep their money accessible while earning something. The rates are typically under 1% APY, much lower than high-yield savings accounts.

Is my money safe if I move it to a bank offering a higher rate?

Yes, as long as the bank is FDIC-insured. You can check whether a bank is insured by searching the FDIC's Bank Find tool on their website. Your deposits are protected up to $250,000 per account type, regardless of the interest rate the bank pays.