What you earn depends on the interest rate your bank sets
Banks pay you money for keeping your savings with them. That payment is called interest. The amount you earn depends on three things: how much money you have in the account, how long it stays there, and the interest rate the bank decides to offer — which changes over time and differs between banks.
Right now, interest rates on savings accounts range widely. Some banks pay less than 0.01% per year, meaning you earn almost nothing. Other banks, especially online-only banks, pay 4% to 5% per year or higher. The difference between a 0.01% account and a 5% account is enormous. On $10,000, you might earn $1 per year at the low rate or $500 per year at the high rate.
Banks set these rates based on what the Federal Reserve does with its own interest rates. When the Federal Reserve raises rates, banks usually raise what they pay you. When the Federal Reserve lowers rates, banks usually lower what they pay you. This means the rate you see today will not stay the same forever.
Key Takeaways
- Interest rates on savings accounts currently range from less than 0.01% to over 5% per year, depending on which bank you use.
- Online banks typically pay higher rates than brick-and-mortar banks because they have lower operating costs.
- Your bank can change the interest rate it pays you at any time, and rates move up and down based on Federal Reserve decisions.
- The interest you earn is calculated on your balance and added to your account monthly or daily, depending on the bank.
- High-yield savings accounts and money market accounts pay more interest than regular savings accounts at the same bank.
Why online banks pay more than traditional banks
Online banks — banks with no physical branches — typically pay 2% to 5% more interest than banks with buildings you can walk into. This is not because they are generous. It is because they spend far less money on rent, staff, and equipment. They pass some of those savings to you as higher interest rates to attract your money.
A traditional bank with branches in your town has to pay for those buildings, the people who work there, and the technology to run them. An online bank has a few data centers and customer service staff, and that is it. The lower costs mean they can afford to pay you more.
This does not mean online banks are riskier. Your money is protected the same way at an online bank as at a traditional bank. The FDIC (Federal Deposit Insurance Corporation) insures up to $250,000 per account holder at any bank, whether it has branches or not.
How interest is calculated and when you see it
Banks calculate interest in two ways: straightforward interest and compound interest. straightforward interest is rare on savings accounts. Compound interest is standard, and it means you earn interest on your interest.
Here is how compound interest works. Say you have $1,000 and your bank pays 5% per year. After one month, the bank adds about $4.17 to your account (one-twelfth of 5%). Now your balance is $1,004.17. The next month, the bank calculates 5% on $1,004.17, not on the original $1,000. You earn a tiny bit more because you earned interest on that $4.17. This compounds month after month.
Most banks compound interest daily or monthly. Daily compounding means you earn slightly more than monthly compounding, but the difference is small on most balances. Your bank will show you when interest posts — usually you see it added to your account once a month, even though it was calculated daily.
The difference between savings accounts, money market accounts, and CDs
Not all savings products pay the same rate. At the same bank, a money market account usually pays more interest than a regular savings account. A CD (certificate of deposit) usually pays even more, but you have to lock your money away for a set time — three months, one year, five years, or longer.
A regular savings account lets you withdraw money whenever you want. A money market account also lets you withdraw, but it may limit how many withdrawals you can make per month. A CD locks your money for the full term. If you take money out early, the bank charges you a penalty, usually a few months' worth of interest.
Because CDs tie up your money longer, banks pay more interest on them. A CD might pay 5.5% while a savings account at the same bank pays 4.5%. The trade-off is that you cannot access the money without a penalty. Money market accounts split the difference — they pay more than savings accounts but less than CDs, and you keep some access to your money.
How to find the current rates banks are offering
Interest rates change constantly, so the rate you see today may not be the rate next month. To find what banks are currently paying, search for "savings account rates" or "high-yield savings accounts." Websites that track rates include Bankrate, DepositAccounts, and the FDIC's own rate search tool.
When you compare rates, look at the APY, not the APR. APY stands for Annual Percentage Yield. It includes the effect of compound interest, so it shows you the real amount you will earn in a year. APR (Annual Percentage Rate) does not include compounding and is less useful for savings accounts.
Also check whether the rate is may provide or variable. A may provide rate stays the same for a set period. A variable rate can change at any time. Most savings accounts have variable rates, which means the bank can lower what it pays you whenever it wants.
What happens to your interest if rates drop
When the Federal Reserve lowers interest rates, banks lower what they pay you. This can happen quickly. You might open an account earning 5% and six months later be earning 3% on new deposits. Your existing balance still earns interest, but at the new, lower rate.
This is why it matters to move your money if your bank's rate falls too far behind. If your bank is paying 1% and other banks are paying 4%, you are losing money by staying. You can move your savings to a higher-paying bank without penalty. There is no fee for closing a savings account and opening one elsewhere.
The only exception is a CD. If you have a CD earning 5% and rates drop to 2%, you are locked in at 5% until the CD matures. This is actually an advantage — you keep earning the higher rate while new savers get lower rates. But if you need the money before the CD matures, you will pay a penalty.
How much you actually earn on different balances
The amount of interest you earn depends on your balance. A higher balance earns more. Here are examples of what you might earn in one year at different rates, though actual earnings will vary based on your bank and how often interest compounds:
| Your Balance | At 0.5% APY | At 2% APY | At 5% APY |
|---|---|---|---|
| $1,000 | $5 | $20 | $50 |
| $5,000 | $25 | $100 | $250 |
| $10,000 | $50 | $200 | $500 |
| $50,000 | $250 | $1,000 | $2,500 |
These are rough estimates and do not account for the exact way your bank compounds interest or the exact number of days in the year. But they show why the interest rate matters. The difference between 0.5% and 5% on $10,000 is $450 per year — money that stays in your pocket instead of the bank's.
Frequently Asked Questions
Do I have to pay taxes on the interest I earn?
Yes. Interest is income, and you owe federal income tax on it. Your bank will send you a form called a 1099-INT if you earn $10 or more in interest during the year. You report this on your tax return. Some states also tax interest income. The amount of tax you owe depends on your total income and tax bracket.
Can a bank change my interest rate without telling me?
Yes, banks can change variable interest rates at any time without advance notice, though most send an email or letter when they do. If you want a may provide rate, you need a CD. For savings accounts, the rate is almost always variable, which is why it is worth checking your bank's current rate every few months and moving your money if a better rate is available elsewhere.
What if my bank goes out of business — do I lose the interest I earned?
No. The FDIC insures your account balance up to $250,000, including any interest that has been added. If your bank fails, the FDIC pays you the full amount, including all interest earned up to the date of failure. Your money is safe even if the bank closes.
Is there a minimum balance to earn interest?
It depends on the bank. Some banks pay interest on any balance, no matter how small. Others require a minimum balance — often $100 to $500 — to earn interest. Some banks pay a higher rate if you maintain a larger balance. Check your bank's terms before opening an account.
How often should I check my interest rate and consider switching banks?
Check your rate every three to six months, especially when the Federal Reserve is changing rates. If your bank's rate has fallen more than 1% below what other banks are offering, moving your money is worth considering. The process takes a few days, and there is no penalty for switching banks.