Savings account interest rates vary widely, and the rate your bank pays depends on the type of account, the bank itself, and the current economic environment

Right now, savings account interest rates range from nearly zero percent at some large banks to around 4 to 5 percent at online banks and credit unions. The difference matters: on $10,000, a 0.01 percent rate earns you about $1 per year, while a 5 percent rate earns you $500 per year. Banks set their own rates, so the same bank may pay different rates on different account types, and rates change frequently—sometimes weekly.

The rate you see advertised is called the Annual Percentage Yield, or APY. This is the total interest you'll earn in a year, including the effect of compounding (when the bank pays interest on the interest you've already earned). When a bank shows you an APY, that's the number to use when comparing accounts, because it tells you the real return on your money.

Key Takeaways

  • Online banks typically pay 4 to 5 percent APY on savings accounts, while large brick-and-mortar banks often pay 0.01 to 0.5 percent on the same type of account.
  • The APY is the only interest rate number you should use to compare accounts, because it includes the effect of compounding and shows your true annual return.
  • Interest rates change frequently and are set by each individual bank, so the rate you see today may be different next month.
  • Money market accounts and certificates of deposit sometimes pay higher rates than regular savings accounts, but they come with different rules about how often you can withdraw your money.

Why banks pay different rates

Banks pay different rates because they operate differently. A large bank with thousands of branches and millions of customers has high costs—they pay for buildings, staff, and advertising. An online bank with no physical locations has much lower costs, so they can afford to pay you more of the interest they earn from lending out deposits.

Banks also set rates based on what the Federal Reserve does. The Federal Reserve is the central bank of the United States, and it sets a target range for a key interest rate. When the Fed raises its rate, banks tend to raise the rates they pay on savings accounts. When the Fed lowers its rate, banks lower what they pay you. This is why savings account rates have changed significantly over the past few years.

How to find the current rates

Interest rates change frequently, so checking a website that lists current rates is more reliable than reading an article. Websites like Bankrate, DepositAccounts, and NerdWallet update their rate listings regularly and let you filter by account type and bank. You can also visit a bank's website directly and look for the savings account page—the APY should be clearly displayed.

When you compare rates, make sure you're looking at the same type of account at each bank. A high-yield savings account at one bank may pay 4.5 percent, while a regular savings account at the same bank might pay only 0.01 percent. The account name matters.

The difference between savings accounts, money market accounts, and CDs

A savings account lets you withdraw money whenever you want, with no penalty. Interest rates on savings accounts are typically lower than on other account types because of this flexibility.

A money market account is a hybrid between a savings account and a checking account. It usually pays a higher interest rate than a savings account, but it may limit how many times per month you can withdraw money. Some money market accounts also come with a debit card or checkbook, so you can access your money more easily than with a regular savings account.

A certificate of deposit, or CD, is an account where you agree to leave your money untouched for a set period—usually three months, six months, one year, or five years. In exchange, the bank pays you a higher interest rate. If you withdraw the money before the term ends, you pay a penalty, usually a few months' worth of interest. CDs currently pay some of the highest rates available, sometimes 5 to 6 percent or higher depending on the term length.

How compounding affects your earnings

Compounding means the bank pays interest on the interest you've already earned. If you have $1,000 in an account paying 5 percent APY, after one year you'll have $1,050. In the second year, the bank pays 5 percent on $1,050, not just the original $1,000, so you earn $52.50 instead of $50. The longer your money sits in the account, the more compounding helps you.

Most savings accounts compound interest daily, which means the bank calculates and adds interest every single day. Some accounts compound monthly or quarterly, which means you earn slightly less. When you're comparing accounts, the APY already includes the effect of compounding, so you don't need to do any math yourself—just compare the APY numbers.

What happens when interest rates fall

If the Federal Reserve lowers its interest rate, banks will eventually lower the rates they pay on savings accounts. This can happen quickly—sometimes within days or weeks. If you have money in a savings account earning 5 percent and rates drop to 2 percent, your rate will drop too (unless you have a CD, which locks in your rate for the full term).

This is why some people move money between accounts when rates change. If you notice your current bank is paying much less than other banks, you can open an account at a bank paying a higher rate and move your money there. There's no penalty for doing this with a savings account—you can withdraw whenever you want.

How FDIC insurance protects your money

The FDIC (Federal Deposit Insurance Corporation) is a government agency that protects your money if a bank fails. If you have up to $250,000 in a savings account at an FDIC-insured bank, that money is protected. This means you can safely compare rates and move your money to whichever bank pays the most, without worrying about losing your savings.

Credit unions offer similar protection through the NCUA (National Credit Union Administration). Both FDIC and NCUA insurance cover savings accounts, money market accounts, and CDs. When you open an account, the bank will tell you whether it's FDIC or NCUA insured—most banks and credit unions are.

Frequently Asked Questions

Why does my bank pay almost no interest?

Large banks with many physical locations often pay very low rates because they have high operating costs and don't need to compete aggressively for deposits. Online banks and credit unions typically pay much higher rates. You can move your money to a higher-paying bank at any time without penalty.

Is a higher interest rate always better?

Higher rates are better for earning money, but check the account rules too. Some high-rate accounts require a large minimum balance, limit how many times you can withdraw, or charge monthly fees that eat into your interest earnings. Compare the full picture, not just the rate.

Can I lock in a rate before it drops?

A CD locks in your rate for the full term—if you open a one-year CD at 5 percent, you'll earn 5 percent for the entire year even if rates drop. A regular savings account rate can change at any time. If you think rates will fall, a CD protects you, but you can't withdraw the money early without paying a penalty.

How often do banks change their interest rates?

Banks can change savings account rates whenever they want, and many do so weekly or even more frequently. CD rates are locked in for the term you choose. If you want to know whether your bank has changed its rate, check their website or call and ask—rates aren't always announced.

Does the interest I earn count as income on my taxes?

Yes, interest earned on savings accounts is taxable income. If you earn $10 or more in interest during the year, the bank will send you a 1099-INT form that you'll use when filing your taxes. Keep track of your interest earnings throughout the year so you're prepared at tax time.