What banks pay you depends on the account type and the bank's rate

Banks pay you interest on money you keep in savings accounts, money market accounts, and some checking accounts. The amount varies widely — from nearly nothing to over 5% per year, depending on which bank you use and what type of account you open. A bank sets its own rate, and that rate can change at any time, so what you earn today may not be what you earn next month.

The bank pays you because it lends out the money you deposit to other customers. When you earn interest, you are being paid a small share of what the bank makes on those loans. The more money you keep in the account and the higher the rate, the more you earn.

Key Takeaways

  • Banks pay interest rates that range from 0.01% to over 5% annually, and each bank sets its own rate independently.
  • Online banks typically pay higher rates than traditional brick-and-mortar banks because they have lower overhead costs.
  • The interest rate a bank offers can change without notice, so the rate you see today may be different in a few weeks.
  • Interest is usually paid monthly or quarterly, and the amount you earn is calculated based on your account balance and the annual percentage yield (APY).

How to find the current rate your bank is paying

Your bank publishes its current rate on its website, usually on the page for each account type. Look for the term Annual Percentage Yield (APY) — this is the rate you will actually earn over a year, including the effect of compounding (when interest earns interest). The APY is the number that matters; ignore any mention of "interest rate" without the word "annual" next to it.

If you already have an account, log into your online banking portal or call the bank's customer service line to ask what rate you are currently earning. The rate you see on the website today may not be the rate you are earning if you opened your account months ago — banks often lower rates for existing customers while advertising higher rates to new ones.

You can compare rates across banks using sites that list current APYs, but verify the rate on the bank's own website before you move money. Rates change frequently, sometimes weekly, so a comparison site may show a rate that is no longer current.

The difference between online banks and traditional banks

Online banks (also called internet banks or direct banks) typically pay 10 to 50 times more interest than traditional banks. A traditional bank might pay 0.01% APY on a savings account, while an online bank pays 4% to 5% APY on the same type of account. The reason is simple: online banks do not operate physical branches, so they spend less money on buildings, staff, and overhead. They pass some of that savings to customers in the form of higher interest rates.

Traditional banks — the ones with branches you can walk into — pay lower rates because their costs are higher. They also tend to pay lower rates because many customers do not shop around; they keep their money where they already bank out of habit or convenience.

The tradeoff is that online banks offer fewer services. You cannot deposit cash at a branch or speak to a person in person. Most online banks let you deposit checks by taking a photo with your phone, and they reimburse ATM fees charged by other banks, but if you need to handle cash regularly, a traditional bank may be more practical despite the lower rate.

How much you actually earn: the math

The amount of interest you earn depends on three things: how much money is in the account, what the APY is, and how long the money stays there. Here is how it works:

If you have $10,000 in an account paying 4.5% APY, you earn $450 per year. If the same account pays 0.01% APY, you earn $1 per year. The difference is real money, and it adds up over time. If you keep $10,000 in a 4.5% account for five years, you earn roughly $2,400 total (the exact amount is slightly higher because of compounding). In a 0.01% account, you earn about $5.

Interest is usually paid monthly or quarterly. When it is paid, the bank adds it to your account balance. The next time interest is calculated, it is calculated on the new, higher balance — that is compounding, and it means your money grows a little faster over time.

Most banks calculate interest daily but pay it monthly or quarterly. That means even if you withdraw money partway through the month, you still earn interest on the money you had for part of that month.

When banks lower or raise their rates

Banks change their rates based on what the Federal Reserve does. When the Federal Reserve raises its benchmark interest rate, banks have more incentive to offer higher rates to attract deposits. When the Federal Reserve lowers its rate, banks lower the rates they pay to customers. This happens because banks borrow money from each other at rates tied to the Federal Reserve's benchmark, and when that cost changes, they adjust what they pay depositors.

A bank can also change its rate for reasons that have nothing to do with the Federal Reserve. A bank that wants to attract more deposits might raise its rate temporarily. A bank that has enough deposits might lower its rate to save money. Banks are not required to notify you before they lower your rate, though many do send an email or letter. You should check your bank's website periodically to see if the rate has changed.

If your bank lowers its rate and you are unhappy, you can move your money to a bank paying a higher rate. There is no penalty for moving money between banks (though moving it to a different type of account at the same bank may trigger a fee if you exceed a certain number of transfers per month).

Accounts that pay nothing or almost nothing

Checking accounts at traditional banks typically pay 0% to 0.01% APY. Some banks do not pay any interest on checking accounts at all. You keep a checking account for the ability to write checks and use a debit card, not to earn money.

If you want to earn interest on the money you use for daily spending, look for a high-yield checking account. These are offered by some online banks and credit unions, and they pay 2% to 5% APY — sometimes higher. The catch is that they usually require you to meet conditions like setting up direct deposit, making a certain number of debit card transactions per month, or maintaining a minimum balance. Read the terms carefully to make sure you can meet the requirements; if you do not, the bank may lower your rate to 0.01% or less.

FDIC insurance and why it matters

The Federal Deposit Insurance Corporation (FDIC) insures deposits at banks up to $250,000 per account type per bank. This means if the bank fails, you get your money back up to that limit. This protection applies whether the bank pays 0.01% or 5% — the insurance is the same.

Online banks are FDIC-insured just like traditional banks. Before you move money to a bank you have not heard of, check that it is FDIC-insured. You can search the FDIC's bank database on its website to confirm. If a bank is not FDIC-insured, your money is at risk if the bank fails.

Frequently Asked Questions

Can I move my money to a higher-paying bank without losing interest?

Yes. When you move money between banks, you do not lose the interest you have already earned. The old bank pays you interest through the day you withdraw, and the new bank starts paying interest the day the money arrives. There is no gap or penalty.

What if I need to withdraw money before the end of the month?

You can withdraw money anytime without losing interest. Interest is calculated daily, so you earn interest on the money for the days it was in the account. If you withdraw halfway through the month, you still earn interest for the first half.

Do I have to pay taxes on the interest I earn?

Yes. Interest is taxable income. Banks send you a 1099-INT form at the end of the year if you earned $10 or more in interest. You report this on your tax return. The amount is usually small, but it still counts as income.

Why does my bank pay less interest than the bank down the street?

Each bank sets its own rate. Traditional banks often pay less because they have higher costs and because many customers do not shop around. Online banks pay more because they have lower overhead. If your current bank is paying less than 1%, moving to an online bank could earn you significantly more on the same money.

What happens to my interest if the bank lowers its rate?

The interest you have already earned stays in your account. Only the rate going forward changes. If you earned $100 in interest last month and the bank lowers its rate this month, you keep the $100 and earn less going forward.