Where higher interest rates come from
Banks pay different interest rates on savings accounts because they compete for your money, and because the Federal Reserve sets a range that affects what all banks can offer. Right now, rates vary widely: a traditional bank might pay 0.01% annual percentage yield (APY), while an online bank might pay 4.5% or higher on the same deposit. The difference between those two accounts on $10,000 is roughly $450 per year versus $1 per year.
The rate you see advertised is the annual percentage yield, or APY. This is the actual return you'll earn over a year, including compounding. It's different from the interest rate itself, which doesn't account for how often the bank adds interest to your balance. Always compare APY, not the interest rate alone.
Banks that operate online with fewer physical branches tend to offer higher rates because their costs are lower. They pass some of that savings to depositors. Banks also raise rates when the Federal Reserve raises its benchmark rate, and lower them when the Fed cuts. If you opened an account two years ago at 0.5% APY, that rate won't automatically climb when rates rise—you have to move your money or your bank has to choose to raise it.
Key Takeaways
- Online banks and credit unions typically offer 4% to 5% APY on savings accounts, while traditional brick-and-mortar banks often offer less than 0.5%.
- Your current bank will not automatically raise your rate when the Federal Reserve raises rates—you may need to switch banks or move money to a higher-paying account.
- High-yield savings accounts are FDIC-insured up to $250,000, the same as regular savings accounts, so the higher rate does not mean higher risk.
- Money market accounts and certificates of deposit (CDs) sometimes pay more than savings accounts, but they may have withdrawal limits or lock-in periods.
- Rates change frequently, so checking your current rate against what new accounts offer takes five minutes and could save you hundreds of dollars per year.
High-yield savings accounts at online banks
A high-yield savings account is a regular savings account offered by online banks or credit unions that simply pays a much higher APY than traditional banks. There is no catch—the money is still FDIC-insured up to $250,000, you can still withdraw it whenever you want, and you still earn interest on every dollar. The only real difference is that you manage the account online instead of walking into a branch.
Online banks offering 4% to 5% APY include Marcus by Goldman Sachs, Ally Bank, American Express Personal Savings, and Discover Bank. Credit unions like Connexus and Pentagon Federal also offer competitive rates. Rates shift frequently, so the highest rate today may not be the highest next month. Websites like Bankrate, DepositAccounts, and NerdWallet track current rates across banks so you can see what's available without visiting each bank's website.
Opening an account at an online bank takes 10 to 15 minutes. You'll need your Social Security number, a government ID, your current address, and a way to fund the account—usually by transferring money from your existing bank. The transfer itself takes one to three business days. Once the account is open, you can move money in and out as often as you want, and interest accrues daily and is added to your balance monthly or daily depending on the bank.
Money market accounts and certificates of deposit
A money market account is a hybrid between a savings account and a checking account. It typically pays a higher interest rate than a savings account, but it may limit how many withdrawals you can make per month (usually six), and it often requires a higher opening deposit. Some money market accounts pay 4.5% to 5% APY, which is competitive with high-yield savings accounts, but read the withdrawal limits before you open one.
A certificate of deposit, or CD, locks your money away for a set period—usually three months to five years—in exchange for a may provide interest rate. CDs often pay 4.5% to 5.5% APY, which is higher than savings accounts. The trade-off is that you cannot touch the money without paying a penalty, usually a few months' worth of interest. CDs make sense if you know you won't need the money for a specific period and you want to lock in a rate before rates fall.
If you have money you won't need for a year or more, a CD ladder—opening multiple CDs with different maturity dates—lets you earn higher rates while still having access to some of your money each year. For example, you could open a one-year CD, a two-year CD, and a three-year CD with the same amount in each. When the one-year CD matures, you can renew it as a three-year CD, so you always have money coming due.
How to move money without losing interest
If your current bank pays 0.01% and you move $10,000 to a bank paying 4.5%, you don't lose the interest you already earned—you just stop earning it at the old rate. Interest accrues daily and is added to your account on a set schedule, usually monthly. Move your money on the day after interest is posted, and you'll capture that month's interest at the old bank before it stops.
When you transfer money from one bank to another, the transfer itself takes one to three business days. During that time, the money is in transit and earning nothing. If you're moving a large amount, consider keeping a small amount in your old account for a few weeks to make sure the transfer clears, then move the remainder. Some online banks offer a service where they'll contact your old bank and pull the money for you, which speeds up the process.
You can open a new account and keep your old one open at the same time. There's no penalty for having accounts at multiple banks. Some people keep a small emergency fund at a traditional bank for branch access and move the bulk of their savings to a high-yield account online. This gives you both convenience and a higher rate.
What happens when rates fall
When the Federal Reserve cuts its benchmark rate, banks lower the APY they offer on new deposits within days or weeks. If you're in a high-yield savings account, your rate will drop too—but usually not as fast as it rises. Online banks tend to hold rates steady longer when rates are falling, because they're competing for deposits. Traditional banks drop rates immediately.
If you lock money into a CD before rates fall, you keep that higher rate for the entire term. If you lock money into a CD and rates rise, you're stuck with the lower rate unless you pay an early withdrawal penalty. This is why CDs are a bet on where rates are headed. If you think rates will fall, a CD locks in today's higher rate. If you think rates will rise, a high-yield savings account lets you move to a better rate when it becomes available.
Rates are set by the market, not by individual banks, so you can't negotiate a higher rate at your current bank. Your only option is to move your money. Some banks will match a competitor's rate if you ask, but this is rare and usually only happens if you have a large balance or a long history with the bank.
Comparing accounts side by side
| Account Type | Typical APY Range | Withdrawal Limits | FDIC Insured | Best For |
|---|---|---|---|---|
| Traditional savings account | 0.01% to 0.5% | None | Yes, up to $250,000 | Emergency access, branch convenience |
| High-yield savings account | 4% to 5% | None | Yes, up to $250,000 | Saving money long-term without locking it away |
| Money market account | 4% to 5% | Usually 6 per month | Yes, up to $250,000 | Higher rate with occasional check-writing |
| Certificate of deposit (CD) | 4.5% to 5.5% | Locked until maturity | Yes, up to $250,000 | Money you won't need for months or years |
Frequently Asked Questions
Is a high-yield savings account safe?
Yes. High-yield savings accounts at banks are FDIC-insured up to $250,000, the same as traditional savings accounts. The higher interest rate does not mean higher risk—it just means the bank operates with lower costs. If the bank fails, the FDIC covers your deposit.
Can I move money between banks without paying a fee?
Yes. Banks cannot charge you to transfer money out. Some banks charge a fee to receive a transfer from another bank, but most online banks do not. Check the account terms before you open it. The transfer itself takes one to three business days.
What if I need the money before a CD matures?
You can withdraw it, but you'll pay an early withdrawal penalty, usually three to six months of interest. If you think you might need the money, a high-yield savings account with no withdrawal limits is a better choice than a CD.
Do I have to pay taxes on interest I earn?
Yes. Interest is taxable income. The bank will send you a 1099-INT form at the end of the year showing how much interest you earned. You report this on your tax return. The higher your interest rate, the more you'll owe in taxes, but you're still ahead because you earned more money overall.
What if my bank stops offering a high rate?
You can move your money to another bank. There's no penalty for closing an account. Open a new account at a bank with a better rate, transfer your money, and close the old account. This takes a few days and costs nothing.