Interest rates on savings accounts vary by bank and change frequently, so there's no single answer

The interest rate your bank pays you on savings depends on three things: which bank you use, what type of savings account you open, and what the current market conditions are. Right now, rates range from nearly zero percent at some large national banks to around 4 to 5 percent at online banks and credit unions, but these numbers shift regularly. The bank sets the rate, and you don't negotiate it — you either accept what they offer or move your money elsewhere.

The reason rates vary so much is that banks compete for your deposits. A bank with few customers might offer a higher rate to attract money. A bank with plenty of customers might offer a lower rate because they don't need to compete as hard. Online banks often pay more than brick-and-mortar banks because they have lower costs — no building to maintain, fewer employees — so they pass some of that savings to you.

Key Takeaways

  • Savings account interest rates are set by each bank and range widely, from under 1 percent to around 5 percent depending on the institution and account type.
  • Online banks and credit unions typically pay higher rates than large national banks because their operating costs are lower.
  • Interest rates change over time based on what the Federal Reserve does, so a rate you see today may be different in three months.
  • The amount of interest you earn depends on how much money you keep in the account and how long you leave it there.
  • You should compare rates across several banks before opening an account, because the difference between a 0.5 percent rate and a 4.5 percent rate adds up quickly.

How the bank calculates what you earn

Banks use a formula called annual percentage yield, or APY, to show you how much interest you'll make in a year. APY accounts for something called compounding, which means the bank pays you interest on your interest. If you earn $10 in interest one month, the next month you earn interest on that $10 plus your original balance.

Here's a concrete example: if you have $1,000 in an account with a 4 percent APY, you'll earn about $40 in the first year. But the bank doesn't wait until the end of the year to pay you — it usually pays monthly or daily. So you might earn $3.33 in the first month, then $3.34 in the second month (because now you're earning interest on $1,003.33), and so on. By the end of the year, you'll have $1,040.

The key thing to understand is that APY is an annual number. If you leave money in the account for only six months, you'll earn roughly half the APY. If you withdraw money partway through the year, you'll earn interest only on the amount that was actually in the account.

Why rates change and what affects them

The Federal Reserve, which is the central bank of the United States, sets a target interest rate that influences what all banks pay. When the Federal Reserve raises its rate, banks tend to raise the rates they pay on savings accounts. When the Federal Reserve lowers its rate, banks lower savings rates too. This happens because banks borrow money from each other at rates set by the Federal Reserve, and those costs get passed along to customers.

The Federal Reserve changes its rate based on inflation and the overall health of the economy. If inflation is high, the Federal Reserve raises rates to cool things down. If the economy is weak, the Federal Reserve lowers rates to encourage borrowing and spending. You can't control what the Federal Reserve does, but you can watch for when it announces changes — that's usually when banks adjust their savings rates.

Banks also change rates based on how much money they have on hand. If a bank has received a lot of deposits recently, it might lower its rate because it doesn't need more money. If a bank needs more deposits, it might raise its rate to attract them.

The difference between APY and APR

You'll see two abbreviations: APY and APR. APY (annual percentage yield) is what banks use for savings accounts and shows you the real amount you'll earn after compounding. APR (annual percentage rate) is what lenders use for loans and credit cards and does not include compounding — it's a simpler number.

For savings accounts, always look at the APY, not the APR. The APY is the honest number that tells you what you'll actually have at the end of the year. Some banks advertise a high APR on savings accounts to make the rate sound better, but the APY is what matters.

How to find the best rate for your situation

Before you open a savings account, visit the websites of at least three to five banks and write down their current APY. Include at least one online bank, one credit union (if you're a member or can join), and one or two national banks. The APY should be clearly displayed on the account details page — if you can't find it, call and ask.

Don't choose a bank based on rate alone. Also check whether the bank charges monthly fees, whether it requires a minimum balance, and whether you can withdraw money without penalty. A bank that pays 4.5 percent but charges a $10 monthly fee might actually earn you less than a bank paying 4 percent with no fees. Read the account agreement carefully before you sign up.

Keep in mind that rates change, so the rate you see today won't last forever. Some banks lower their rates after a few months. If you find a bank with a good rate, it's worth checking back every few months to see if it's still competitive. If another bank offers significantly more, you can move your money — it's free to do so.

What happens if you need the money before the year is over

Most savings accounts let you withdraw money anytime without penalty, which is different from certificates of deposit (CDs), where you agree to leave money untouched for a set period. If you withdraw from a savings account early, you straightforward stop earning interest on that amount — you don't lose money you've already earned.

However, some savings accounts have limits on how many times you can withdraw per month. Federal rules used to require this, but those rules changed in 2020. Now it depends on the bank. Check the account agreement to see if there are withdrawal limits, and ask what happens if you exceed them.

Frequently Asked Questions

Is the interest I earn on a savings account taxed?

Yes. The interest you earn counts as income, and you'll owe federal income tax on it. Your bank will send you a form called a 1099-INT at the end of the year showing how much interest you earned. You report this on your tax return. Some states also tax interest income, depending on where you live.

Why do some banks offer 0 percent interest on savings?

Banks that offer very low or zero interest usually have other advantages — they might have no monthly fees, no minimum balance, or be part of a large network of ATMs. They're betting you'll stay with them for convenience rather than interest. If interest matters to you, these accounts aren't the right choice.

Can I move my money to a different bank if I find a better rate?

Yes, completely free. You can open a new account at another bank and transfer your money over. It usually takes one to three business days. Your old account will close, and you'll start earning the new rate at the new bank. There's no penalty for switching.

What's the difference between a savings account and a money market account?

A money market account usually pays a slightly higher interest rate than a regular savings account, but it may require a larger minimum balance and might limit how many times you can withdraw per month. Both are safe places to keep money. Choose based on how often you need to access the money and how much you have to deposit.

Will my interest rate stay the same forever?

No. Banks can change the rate they pay on savings accounts anytime, usually with notice. When the Federal Reserve changes its rate, most banks adjust their savings rates within a few weeks. If you want to keep earning a may provide rate, you'd need a CD, which locks in a rate for a specific time period.