How much interest your savings account earns depends on the rate your bank or credit union sets, which changes based on what the Federal Reserve does with its benchmark rate

The interest rate on a savings account is not fixed by law or set by the government. Your bank or credit union decides what rate to offer, and that rate can change at any time. Right now, rates range from nearly 0% at some large national banks to 4% to 5% at online banks and credit unions, depending on the institution and the account type. The difference between these rates is real money: on $10,000, the difference between 0.01% and 4.5% is roughly $450 per year.

Banks set their rates based on what the Federal Reserve does with its benchmark interest rate, called the federal funds rate. When the Fed raises its rate, banks usually raise what they pay on savings accounts. When the Fed cuts its rate, banks usually cut what they pay. The lag between a Fed move and a bank's response can be weeks or months, and some banks move faster than others.

Key Takeaways

  • Interest rates on savings accounts vary widely by bank and account type, ranging from under 0.1% to over 5% depending on current market conditions.
  • Your bank sets the rate and can change it without notice, though online banks and credit unions typically offer higher rates than large national banks.
  • The amount you earn is calculated by multiplying your balance by the annual percentage yield (APY), which includes the effect of compounding.
  • You can find current rates by checking your bank's website or using rate-comparison tools, but rates change frequently so the number you see today may not be what you earn next month.

How banks calculate the interest you earn

Banks use a number called the annual percentage yield (APY) to tell you how much you will earn in a year. The APY includes the effect of compounding — meaning interest earned on interest — so it is higher than the base interest rate. If a bank advertises an APY of 4.5%, that means if you keep $1,000 in the account for a full year without adding or withdrawing money, you will have $1,045 at the end of the year.

The actual calculation happens daily or monthly, depending on the bank. Most banks calculate interest daily and add it to your account monthly. If you withdraw money partway through the month, you earn interest only on the balance you held for each day. If you add money, you start earning interest on that new amount the next day.

Some accounts offer tiered rates, meaning you earn a higher rate on larger balances. For example, a bank might pay 2% APY on balances under $25,000 and 4% APY on balances above that. Check your account terms to see whether your rate changes based on how much you have.

Why rates differ between banks and account types

Online banks typically offer higher rates than brick-and-mortar banks because they have lower overhead costs — no physical branches to maintain, fewer employees, lower rent. They pass some of those savings to customers in the form of higher interest rates. A large national bank might pay 0.01% while an online bank pays 4.5% on the same type of account.

Credit unions often pay higher rates than banks because they are member-owned cooperatives rather than for-profit corporations. They return earnings to members instead of shareholders. However, credit unions have membership requirements — you may need to live in a certain area, work for a certain employer, or belong to a certain organization to join.

Money market accounts and certificates of deposit (CDs) sometimes pay higher rates than regular savings accounts, but they come with trade-offs. A money market account may limit how many withdrawals you can make per month. A CD locks your money for a set period — three months, six months, a year, or longer — and charges a penalty if you withdraw early.

What happens when the Federal Reserve changes rates

The Federal Reserve meets eight times a year to set its benchmark rate. When it raises the rate, banks have more incentive to pay higher rates on savings accounts because they can charge more on loans. When it cuts the rate, banks lower what they pay on savings because they earn less on loans. The relationship is not one-to-one — a 0.25% Fed rate cut does not always mean your savings rate drops by exactly 0.25%.

Banks do not always move at the same speed. Some raise rates within days of a Fed increase. Others wait weeks or months. Some banks cut rates on savings accounts quickly when the Fed cuts, but raise rates slowly when the Fed increases. This is why shopping around matters: at any given moment, different banks are offering different rates based on their own strategy.

You can track Fed rate decisions on the Federal Reserve's website, which publishes the date and size of each change. Major financial news outlets also report on Fed decisions the day they happen.

How to find current rates and compare them

Your bank's website shows the current APY for each account type, usually in a section labeled "rates" or "disclosures." The rate displayed is what new customers can open an account at, but existing customers may see a different rate. Call your bank or log into your account to see what rate you are actually earning.

Rate-comparison websites like Bankrate, DepositAccounts, and NerdWallet let you filter by account type and sort by APY. These sites update rates frequently but not in real time, so the rate you see may have changed since the site last updated. Always verify the rate on the bank's own website before opening an account.

When comparing rates, look at the APY, not the base interest rate. The APY is the number that matters for what you will actually earn. Also check whether there are any fees that would reduce your earnings — monthly maintenance fees, minimum balance fees, or withdrawal fees.

What you earn on different account balances

The amount of interest you earn is straightforward math: balance multiplied by APY, divided by 365 days. On a $5,000 balance at 4.5% APY, you earn roughly $225 per year, or about $18.75 per month. On a $50,000 balance at the same rate, you earn roughly $2,250 per year, or about $187.50 per month.

The interest compounds, meaning you earn interest on the interest you already earned. If your bank compounds daily, the effect is small but real. Over a year, daily compounding at 4.5% APY on $10,000 earns about $459, while monthly compounding earns about $458. The difference grows larger the longer the money sits.

If you are saving for a specific goal and want to know how long it will take to reach it, you can use an online savings calculator. You enter your starting balance, the APY, and how much you add each month, and it shows you the balance at any future date.

Why your rate might change without warning

Banks can change the interest rate on a savings account at any time without your permission. They must notify you before the change takes effect, usually by email or through your online banking portal, but they do not need your approval. If your bank lowers the rate, you can move your money to another bank that pays more. If your bank raises the rate, you benefit when ready.

Rate changes happen most often when the Federal Reserve moves its benchmark rate, but banks also change rates based on their own business needs. A bank that is trying to attract new customers might raise rates temporarily. A bank that has too many deposits might lower rates to slow growth.

If you want to stay informed about rate changes, set up alerts on rate-comparison websites or check your bank's website monthly. Some banks notify you by email when rates change, but not all do.

Frequently Asked Questions

Is the interest I earn on a savings account taxed?

Yes. Interest earned on a savings account is taxable income. Your bank will send you a Form 1099-INT at the end of the year showing how much interest you earned, and you report that amount on your tax return. The tax rate depends on your overall income and tax bracket.

Can I lose money in a savings account if interest rates fall?

No. Your principal — the money you deposited — is protected. If interest rates fall, you straightforward earn less interest going forward, but you do not lose the money itself. Your balance will never go down unless you withdraw money or pay a fee.

What is the difference between APY and APR?

APY (annual percentage yield) includes the effect of compounding and is what you will actually earn. APR (annual percentage rate) does not include compounding and is used mainly for loans and credit cards. For savings accounts, always look at the APY.

Do I earn interest if I keep my money in a checking account instead?

Most checking accounts earn little to no interest. Some banks and credit unions offer checking accounts that pay interest, but the rate is usually much lower than a savings account. If you want to earn interest, a savings account is the standard choice.

What happens to my interest if I withdraw money before the end of the month?

You earn interest only on the balance you held for each day. If you have $5,000 for 20 days and then withdraw $2,000, you earn interest on $5,000 for those 20 days and on $3,000 for the remaining days of the month. The bank calculates this automatically.