Most savings accounts do earn interest, but the amount varies widely depending on the bank and the account type

When you put money in a savings account, the bank uses that money to lend to other customers. In return, the bank pays you a small percentage of your balance each month or year. This payment is called interest. The percentage the bank pays you is called the interest rate or annual percentage yield (APY).

Not every savings account earns the same amount. A traditional savings account at a large bank might earn 0.01% APY, meaning you'd earn about one penny per year on every $100 you keep there. A high-yield savings account at an online bank might earn 4% to 5% APY, meaning you'd earn $4 to $5 per year on that same $100. The difference comes down to how much the bank needs to attract deposits and how much it costs the bank to operate.

The interest rate your account earns can also change. Banks adjust their rates based on what the Federal Reserve does with interest rates nationally. When the Fed raises rates, banks often raise the rates they pay on savings. When the Fed lowers rates, banks usually lower what they pay you.

Key Takeaways

  • All savings accounts earn some interest, but the rate depends on the bank and account type — online banks typically pay more than traditional banks.
  • Your interest rate is shown as an APY (annual percentage yield), which tells you what percentage of your balance you'll earn in a year.
  • Interest is usually added to your account monthly, and you earn interest on your interest the next month (called compounding).
  • The interest rate your account earns can change at any time, so check your bank's website or statement to see your current rate.

How interest gets added to your account

Banks calculate your interest based on your account balance and add it to your account on a regular schedule — usually monthly, sometimes daily. When the bank adds interest, that money becomes part of your balance. The next month, you earn interest on the original balance plus the interest that was just added. This is called compounding, and it means your money grows a little faster over time.

For example, if you have $1,000 in an account earning 4% APY, the bank might add about $3.33 in January (one-twelfth of 4%). In February, you earn interest on $1,003.33, not just the original $1,000. The difference is small month to month, but over years it adds up.

Why interest rates are different at different banks

Online banks usually pay higher interest rates than banks with physical branches. This is because online banks have lower costs — they don't pay for buildings, tellers, or as many staff members. They pass some of those savings to customers by paying more interest.

Large national banks often pay very low interest rates because they don't need to attract deposits the way smaller banks do. People keep money there for convenience, not for the interest. Credit unions, which are member-owned rather than profit-driven, sometimes pay rates between online banks and traditional banks.

The type of account also matters. A regular savings account usually earns less than a money market account or a certificate of deposit (CD). A CD locks your money away for a set time — three months, one year, five years — and in exchange pays a higher rate. If you withdraw the money early, you pay a penalty.

What to do if your bank's interest rate is very low

If you've had the same savings account for years, your rate may be much lower than what new customers get. Banks often offer promotional rates to attract new customers, then lower the rate after a few months. You can call your bank and ask if they'll raise your rate, but they usually won't unless you threaten to move your money.

Moving your money to a bank with a higher rate is straightforward. You open a new account at the new bank, transfer your balance over, and close the old account. This takes a few days for the transfer to complete. There's no penalty for moving your savings — the penalty only applies to CDs and some other locked accounts.

Before you move, check whether the new bank has any monthly fees that would eat into your interest earnings. A high interest rate doesn't help if you're paying $10 a month in account fees.

How to find your current interest rate

Your bank statement shows your interest rate, usually listed as APY. You can also log into your online banking account and look for account details or account information. If you can't find it there, call your bank's customer service number — it's on the back of your debit card — and ask what your current APY is.

The rate you see is the rate you're earning right now, but it can change. Banks are required to notify you before they lower your rate, usually by email or mail. If you want to know when rates change, check your bank's website occasionally or sign up for email notifications if your bank offers them.

Interest on savings versus interest on checking accounts

Checking accounts rarely earn interest, or earn so little that it doesn't matter. Banks pay almost nothing on checking accounts because people use them to spend money, not to save it. The bank makes money from checking accounts through overdraft fees and other charges, not by paying interest.

If you want your money to earn interest, it needs to be in a savings account, money market account, or CD. Some banks offer "interest-bearing checking" accounts, but the rates are typically lower than savings accounts at the same bank.

What happens to interest if you withdraw money

If you withdraw money from your savings account before the interest is added, you don't earn interest on the amount you withdrew. For example, if you have $1,000 on the first of the month and withdraw $500 on the fifteenth, you earn interest only on the average balance for that month, not the full $1,000.

Some banks calculate interest based on your lowest balance during the month, which means a single withdrawal can reduce the interest you earn for the entire month. Other banks calculate based on the average balance or the daily balance. Check your account details to see which method your bank uses — it can make a real difference if you move money in and out frequently.

Frequently Asked Questions

Can I lose money if my savings account earns interest?

No. Interest only adds money to your account; it never subtracts. The worst that can happen is that your interest rate drops to nearly zero, but you won't lose what you've already saved. The only exception is if you withdraw from a CD early — then you pay a penalty that might be larger than the interest you've earned.

Is the interest I earn taxed?

Yes. Interest is considered income, and you owe taxes on it. If you earn more than $10 in interest in a year, your bank will send you a form called a 1099-INT that you use when filing taxes. The amount is usually small enough that it doesn't change your tax bill much, but you do have to report it.

Why does my bank say my APY is 4.5% but I'm not earning that much?

APY is the yearly rate, but interest is usually added monthly. If you've only had the money in the account for a few months, you've only earned a fraction of the yearly amount. Also, if your balance changed during the month, you earned interest on the average or lowest balance, not the full amount.

What's the difference between APY and APR?

APY (annual percentage yield) includes compounding — interest on your interest. APR (annual percentage rate) does not. For savings accounts, you want to see APY because that's the real amount you'll earn. APR is used for loans and credit cards.

If I move my money to a different bank, do I lose the interest I've already earned?

No. Interest that's already been added to your account is yours to keep. When you transfer your balance to a new bank, you transfer the full amount including all interest earned. You only lose future interest if you close the account before the next interest payment date.