What you earn depends on the bank, the account type, and the current rate environment
Banks pay interest on savings accounts as a percentage of your balance, expressed as an Annual Percentage Yield (APY). The amount you actually earn varies widely: as of late 2024, traditional brick-and-mortar banks often pay between 0.01% and 0.05% APY, while online banks and credit unions typically offer 4% to 5.35% APY on high-yield savings accounts. The difference between these rates is real money—on a $10,000 balance, 0.01% earns $1 per year, while 5% earns $500 per year.
The rate a bank offers depends on three things: what the Federal Reserve has set as its benchmark rate, how much competition exists in your market, and what type of account you hold. Banks with lower overhead costs (online banks) can afford to pay more. Banks with physical branches pass those costs to customers through lower rates. Money market accounts and certificates of deposit (CDs) often pay more than regular savings accounts because you agree to keep money there longer or accept limited withdrawals.
Key Takeaways
- Online banks and credit unions currently pay 4% to 5.35% APY on savings, while traditional banks often pay under 0.1% APY on the same type of account.
- Interest rates change when the Federal Reserve adjusts its benchmark rate, so the APY your bank advertises today may be lower in six months.
- The interest you earn is calculated daily but usually credited monthly, so you begin earning interest on new deposits immediately.
- Banks are required to disclose the APY in writing before you open an account, and you can compare rates across institutions before deciding where to keep your money.
How banks calculate and pay interest on your balance
Interest accrues daily on most savings accounts. The bank takes your account balance at the end of each day, multiplies it by the APY, divides by 365, and adds that amount to a running total. At the end of the month (or quarter, depending on the bank), that total is deposited into your account as interest.
This means you start earning interest on a deposit the same day it clears, and you continue earning interest on that interest once it is credited to your account. If you deposit $5,000 on the first of the month and the account pays 5% APY, you earn roughly $20.83 that month (5% of $5,000 divided by 12 months). If you leave that $20.83 in the account, next month you earn interest on $5,020.83, not just $5,000.
The bank does not send you a check or require you to do anything. The interest simply appears in your account on the crediting date. You can withdraw it, leave it to compound, or transfer it elsewhere.
Why rates differ so much between banks
The biggest factor is operating cost. An online bank with no branches, no tellers, and no physical locations can afford to pay 5% because it spends far less money running the business. A traditional bank with hundreds of branches, thousands of employees, and real estate costs must charge more for checking accounts and pay less on savings to cover those expenses.
The second factor is competition for deposits. When many banks offer high rates, they are competing for your money. When rates are low across the board, banks have less incentive to offer more. During periods when the Federal Reserve keeps rates high, online banks often raise their savings rates quickly to attract deposits. When the Fed cuts rates, online banks usually lower their rates within days or weeks.
The third factor is account type. A regular savings account typically pays less than a money market account, which pays less than a CD with a one-year term, which pays less than a CD with a five-year term. The longer you commit to leaving money untouched, the more the bank pays you.
How Federal Reserve rate changes affect what you earn
The Federal Reserve does not set savings account rates directly. Instead, it sets a target range for the federal funds rate, which is the rate banks charge each other for overnight loans. When the Fed raises this rate, banks have more incentive to offer higher savings rates to attract deposits. When the Fed cuts rates, banks lower savings rates because they have less incentive to compete.
The lag between a Fed rate change and a change to your account's APY is usually quick—often within days for online banks, sometimes within weeks for traditional banks. However, banks are not required to pass along the full Fed rate cut to savers. A bank might cut your savings rate by 0.5% even if the Fed only cut its rate by 0.25%, because the bank wants to protect its profit margin.
You can track the Fed's current rate on the Federal Reserve's website. Comparing that to the APY your bank is currently offering tells you whether your bank is competitive or whether you should consider moving your money.
What to look for when comparing savings account rates
The number to compare is always the APY, not the interest rate. APY includes the effect of compounding, so it is the true annual return. A bank that advertises "5% interest" but compounds quarterly might actually pay 5.09% APY. The bank must disclose the APY in the account disclosure document before you open the account.
Check whether the rate is may provide or variable. Most savings accounts have variable rates, meaning the bank can lower the APY at any time with notice (usually 30 days). Some banks offer promotional rates that are high for a limited time, then drop. Read the fine print to see when a promotional rate expires and what the regular rate will be after that.
Also confirm the minimum balance required to earn the advertised rate. Some banks pay the full APY only if you maintain a certain balance—often $25,000 or more. If your balance falls below that, the rate drops significantly. Other banks pay the same rate on any balance, no matter how small.
How much interest you actually earn on common balances
| Balance | At 0.05% APY (typical bank) | At 5% APY (typical online bank) | Annual difference |
|---|---|---|---|
| $1,000 | $0.50 | $50 | $49.50 |
| $5,000 | $2.50 | $250 | $247.50 |
| $10,000 | $5 | $500 | $495 |
| $50,000 | $25 | $2,500 | $2,475 |
These figures assume the rate stays constant for the full year. In reality, rates change, so your actual earnings will differ. The table shows why the choice of bank matters: keeping $50,000 in a traditional bank account costs you roughly $2,500 per year compared to an online bank, assuming current rate differences hold.
Your actual earnings also depend on how long money sits in the account. If you deposit $10,000 for six months instead of a full year at 5% APY, you earn $250 annually but only $125 for that six-month period. Banks calculate interest based on the exact number of days the money is on deposit.
When to move your money to a higher-paying account
If your current bank pays less than 1% APY and online banks are paying 4% or higher, moving your money takes about 15 minutes and costs nothing. Most online banks offer free transfers from your existing bank account. You can initiate the transfer online, and the money usually arrives within one to three business days.
Before you move, confirm that the new bank is FDIC-insured (or NCUA-insured if it is a credit union). This protects your deposits up to $250,000 if the bank fails. Nearly all online banks and traditional banks carry this protection, but it is worth verifying.
You do not need to close your old account immediately. You can keep it open and move money gradually, or close it once the transfer is complete. There is no penalty for moving your savings to a different bank.
Frequently Asked Questions
Do I have to pay taxes on the interest I earn?
Yes. Interest earned on a savings account is taxable income. If you earn $50 or more in interest during the year, the bank will send you a 1099-INT form by January 31 for tax filing. You report this on your tax return. The amount you owe in taxes depends on your tax bracket.
Can a bank lower my interest rate without warning?
A bank can lower your rate, but it must notify you first, usually with 30 days' notice. You will receive a notice by mail or email before the change takes effect. You can then decide whether to move your money to a different bank.
What is the difference between APY and APR on a savings account?
APY (Annual Percentage Yield) includes compounding, so it shows your true annual return. APR (Annual Percentage Rate) does not include compounding. Banks must disclose the APY for savings accounts, so that is the number to use when comparing rates.
Do credit unions pay more interest than banks?
Many credit unions pay competitive rates similar to online banks, though some pay less. Credit unions are not-for-profit institutions, so they can return earnings to members through higher rates. However, you must be a member to open an account, which sometimes requires living in a certain area or working for a specific employer.
Is my money safe in an online bank if the rates are so high?
Online banks are regulated the same way as traditional banks and carry FDIC insurance up to $250,000 per account. The reason they can pay higher rates is lower operating costs, not because they take more risk with your money. Your deposits are as safe as they would be at any FDIC-insured bank.