Banks pay you interest on savings and money market accounts, but the rate depends on the account type, the bank, and current Federal Reserve policy

The amount a bank pays you is called interest, and it comes in two main forms: interest on savings accounts and money market accounts, and sometimes small payments for keeping a checking account open. Banks set their own rates within limits set by the Federal Reserve. A savings account at one bank might pay 4.5% annually, while another pays 0.01%. A checking account at most large banks pays nothing; some credit unions and online banks pay 1% to 2% on checking balances.

The rate you receive depends on three things: which bank you choose, which account type you open, and what the Federal Reserve's current interest rate environment is. When the Fed raises rates, banks typically raise what they pay depositors. When the Fed cuts rates, banks cut what they pay. You do not have to accept whatever rate your current bank offers — you can move your money to a bank with a higher rate at any time.

Key Takeaways

  • Savings accounts and money market accounts earn interest that varies by bank and account type, ranging from nearly 0% at large national banks to 4% to 5% at online banks and credit unions.
  • Checking accounts at most major banks pay no interest, though some online banks and credit unions pay 1% to 2% on checking balances.
  • The interest rate the Federal Reserve sets influences what banks pay, but each bank chooses its own rate within that environment.
  • You can move your money to a different bank to get a higher rate without penalty, though the transfer typically takes three to five business days.
  • Interest is taxable income, and banks send you a 1099-INT form at the end of the year if you earned $10 or more in interest.

How savings account interest rates work

A savings account is the most common way banks pay you to keep money with them. The bank takes your deposit, lends it out to other customers, and pays you a percentage of what it earns. That percentage is the interest rate, expressed as an annual percentage yield (APY). If you have $10,000 in a savings account paying 4.5% APY, you earn about $450 per year, paid monthly or quarterly depending on the bank.

The rate you see advertised is not may provide forever. Banks can lower the rate at any time, usually when the Federal Reserve cuts its benchmark rate. Some banks lower rates within days of a Fed cut; others wait weeks. You will not receive a notice before the cut happens at most banks — you have to check your account or log in to see the new rate. If your bank's rate drops and you want a higher rate, you can move your money to another bank without penalty.

Online banks and credit unions typically pay higher rates than large national banks because they have lower overhead costs. A national bank like Chase or Bank of America might pay 0.01% to 0.05% on savings, while an online bank like Marcus or Ally might pay 4% to 5%. The tradeoff is that online banks have no physical branches and customer service is phone or chat only.

Money market accounts and certificates of deposit

A money market account is a hybrid between a savings account and a checking account. It pays interest like a savings account but lets you write checks or use a debit card like a checking account. Money market rates are usually slightly higher than savings rates at the same bank because you have limited withdrawal rights — typically six withdrawals per month before fees kick in.

A certificate of deposit (CD) is a different product. You agree to leave your money in the account for a set time — three months, six months, one year, five years — and the bank pays you a fixed rate for that entire period. CD rates are usually higher than savings rates because you cannot touch the money without paying a penalty. A one-year CD might pay 5% while a savings account at the same bank pays 4%. If you withdraw early, you lose some or all of the interest you earned.

CDs are useful if you know you will not need the money for a specific time period and want to lock in a rate before rates fall. They are not useful if you might need the money sooner, because the penalty can be steep — sometimes three to six months of interest.

Checking account interest and rewards

Most checking accounts at large national banks pay no interest. You get a debit card, online access, and bill pay, but the bank pays you nothing on your balance. This is standard at Chase, Bank of America, Wells Fargo, and most regional banks.

Some banks do pay interest on checking. Online banks like Ally and Charles Schwab pay 1% to 2% APY on checking balances with no minimum balance. Credit unions often pay higher rates on checking — sometimes 3% to 5% — but usually require you to meet conditions like setting up direct deposit or making a certain number of debit card transactions per month. If you meet those conditions, the rate applies; if you do not, the rate drops to 0.01% or lower.

A few banks offer cash back or rewards points on debit card purchases, but that is different from interest. You earn a small percentage back on what you spend, not on what you hold in the account.

How the Federal Reserve affects what banks pay you

The Federal Reserve sets a benchmark interest rate called the federal funds rate. This is the rate banks charge each other to borrow overnight. When the Fed raises this rate, banks have to pay more to borrow, so they raise the rates they pay depositors to attract money. When the Fed cuts the rate, banks lower what they pay you.

The Fed does not directly set the rates banks pay on savings or checking accounts. Each bank decides its own rate. But banks watch the Fed rate closely. If the Fed raises rates and your bank does not raise what it pays you, you can move your money to a competitor who does. This competition is what keeps rates from falling too far below the Fed rate.

In 2022 and 2023, the Fed raised rates aggressively to fight inflation. Savings rates climbed from 0.01% to 4% or higher at online banks. In 2024, the Fed began cutting rates, and savings rates started falling. If you locked in a high rate in 2023, you may want to check whether your bank has lowered it and whether moving to another bank would give you a better rate.

Comparing banks to find the highest rate

The easiest way to compare rates is to visit bank websites directly or use a rate comparison site like Bankrate, DepositAccounts, or NerdWallet. These sites list current rates at hundreds of banks and update them daily. You can filter by account type (savings, money market, CD), term length (for CDs), and minimum balance requirements.

When comparing, look at the APY, not just the interest rate. APY accounts for how often the bank compounds interest (daily, monthly, quarterly), so it shows the true annual return. A bank advertising 4.5% APY will pay you more than a bank advertising 4.5% interest compounded quarterly.

Also check the minimum balance requirement. Some banks require $25,000 or more to open a high-yield savings account. Others have no minimum. If you have $5,000 to deposit, a bank requiring $25,000 minimum will not work for you. Online banks and credit unions typically have low or no minimums.

Moving money to a higher-paying bank

If you find a bank paying a higher rate, you can move your money without losing interest or paying a fee. Most banks offer free transfers between banks using ACH (Automated Clearing House), which takes three to five business days. You can also withdraw cash and deposit it at the new bank, though this is slower and you lose interest during the gap.

To transfer, log into your new bank's website and look for "external transfer" or "move money from another bank." You will need your old bank's routing number and your account number. The new bank will pull the money from your old account. Your old bank cannot charge you a fee for this, though some banks charge a fee if you close the account within a certain time period (usually 90 to 180 days). Read the terms before you open the new account.

You do not have to close your old account right away. You can leave it open with a small balance and move most of your money to the new bank. This is useful if you have automatic payments or direct deposits set up at the old bank and want time to update them.

Interest income and taxes

Interest you earn on savings, money market, and CD accounts is taxable income. At the end of the year, your bank sends you a Form 1099-INT if you earned $10 or more in interest during the year. You report this on your tax return, and you owe federal income tax on it at your ordinary income tax rate.

If you earned less than $10, the bank does not send a form, but you still owe tax on the interest if you file a return. Keep track of all interest earned, even small amounts.

Some states also tax interest income, while others do not. Check your state's tax rules or ask a tax professional if you are unsure. If you live in a state with no income tax (like Florida, Texas, or Wyoming), you owe federal tax but not state tax on interest.

Frequently Asked Questions

Can I move my money to a different bank without losing the interest I already earned?

Yes. Interest you have already earned belongs to you. When you transfer money, the old bank pays you the interest through the date of transfer, and the new bank starts paying interest on the new deposit the next day. You do not lose any interest by switching banks.

What happens if a bank goes out of business?

The Federal Deposit Insurance Corporation (FDIC) protects deposits up to $250,000 per account type at each bank. If a bank fails, the FDIC pays you back up to $250,000. If you have more than $250,000 at one bank, the amount over $250,000 is at risk. Credit unions are insured by the National Credit Union Administration (NCUA) with the same $250,000 limit.

Why do online banks pay more interest than big banks?

Online banks have lower costs because they do not operate physical branches, do not pay as many employees, and do not spend as much on marketing. They pass these savings to customers in the form of higher interest rates. Big banks have higher overhead and can afford to pay less because customers stay for convenience and brand recognition.

Do I have to pay taxes on interest if I only earned a few dollars?

Yes, technically. Any interest income is taxable. However, if your total income is below the filing threshold for your age and filing status, you may not have to file a return. Check the IRS website or ask a tax professional whether you need to file based on your total income.

Can a bank lower my interest rate without warning?

Yes. Banks can lower rates at any time without notice. They typically lower rates when the Federal Reserve cuts its benchmark rate. You should check your rate periodically — monthly or quarterly — to see if it has changed. If it has dropped significantly, you can move your money to a bank with a higher rate.