Interest rates on savings accounts are set by your bank, not by you, and they change based on what the Federal Reserve does with its benchmark rate

Your bank decides how much interest to pay you on the money you keep in savings. That rate is not fixed — it moves up and down, usually when the Federal Reserve raises or lowers its own rates. Right now, rates vary widely: some banks pay 0.01% annual percentage yield (APY), while others pay 4.5% or higher. The difference between a 0.01% account and a 4.5% account on $10,000 is roughly $450 per year, so the bank you choose matters.

Interest gets added to your account on a schedule your bank sets — usually daily, monthly, or quarterly. When interest is added more often (daily compounding), you earn a small amount of interest on the interest itself. The total amount you earn depends on three things: the APY your bank offers, how much money sits in the account, and how long it stays there.

Key Takeaways

  • Banks set their own interest rates, and rates change when the Federal Reserve adjusts its benchmark rate, so checking your bank's current rate is the only way to know what you will earn.
  • Online banks and credit unions typically offer higher rates than traditional brick-and-mortar banks because their costs are lower.
  • Interest compounds on different schedules — daily compounding earns you slightly more than monthly or quarterly — so the compounding frequency matters alongside the APY.
  • Your interest earnings are taxed as ordinary income, so you will receive a 1099-INT form from your bank if you earn $10 or more in a year.
  • High-yield savings accounts and money market accounts earn more interest than regular savings accounts, but they may have withdrawal limits or higher minimum balances.

Where to find the interest rate your bank is currently offering

Your bank publishes its current APY on its website, usually on the savings account product page. Log into your online banking portal and look for "interest rate," "APY," or "annual percentage yield" in the account details section. If you cannot find it online, call your bank's customer service line and ask for the current APY on your specific account type — rates can differ between regular savings, high-yield savings, and money market accounts at the same bank.

The rate you see online is the rate new customers get when they open an account today. If you opened your account months or years ago, your rate may be lower. Banks do not automatically raise old accounts to match new rates; you have to ask or switch banks. Some banks will match a competitor's rate if you ask, but most will not.

How often interest gets added to your account

Banks compound interest on different schedules. Daily compounding means interest is calculated and added every day; monthly compounding means it happens once a month; quarterly compounding means four times a year. The more often interest compounds, the more you earn, because you earn interest on the interest from previous periods.

On a $10,000 balance at 4.5% APY, the difference between daily and quarterly compounding is small — roughly $30 per year — but it adds up over time. Most online banks use daily compounding. Your bank's website or account agreement will state the compounding frequency; if it does not say, call and ask.

Why online banks and credit unions usually pay more

Online banks have lower overhead costs than banks with physical branches, so they pass some of that savings to customers in the form of higher interest rates. Credit unions are member-owned and often prioritize paying competitive rates to members. Traditional banks with many branches tend to offer lower rates because their costs are higher.

The trade-off is convenience: an online bank has no branch you can walk into, so deposits and withdrawals happen by mail, mobile app, or electronic transfer. Credit unions may have fewer ATMs and branches than large national banks. If you value in-person service, you may earn less interest, but you gain access to a teller and physical location.

High-yield savings accounts and money market accounts earn more, with conditions

A high-yield savings account is simply a savings account at a bank that pays a higher rate than its regular savings product. There is no special qualification — you open one the same way you open any savings account. The catch is that some high-yield accounts have a minimum balance requirement (often $1,000 to $25,000) or a limit on how many withdrawals you can make per month without a fee.

A money market account is a hybrid between a savings account and a checking account. It usually pays higher interest than a regular savings account but lower than a high-yield savings account. Money market accounts often come with a debit card and check-writing privileges, but they also have withdrawal limits and higher minimum balances. Compare the rates, fees, and withdrawal rules before opening one.

How interest earnings are taxed

Interest you earn on a savings account is taxed as ordinary income at your federal tax rate. If you earn $10 or more in interest during a calendar year, your bank will send you a Form 1099-INT by January 31 of the following year. You report this income on your tax return, and you owe federal income tax on it.

Some states also tax interest income, though a few states exempt it. Check your state's tax rules or ask a tax professional if you are unsure. The interest you earn reduces the amount of tax-deductible losses you can claim in other areas, so keeping track of your 1099-INT is important for accurate filing.

What happens when the Federal Reserve changes rates

When the Federal Reserve raises its benchmark rate, banks usually raise the interest rates they offer on savings accounts within days or weeks. When the Federal Reserve lowers its rate, banks typically lower savings rates quickly as well. The connection is not automatic — your bank is not required to match the Fed's move exactly — but competitive pressure usually forces banks to stay roughly in line.

If you locked money into a certificate of deposit (CD) at a fixed rate, that rate does not change when the Fed moves. But money in a regular savings account or high-yield savings account will earn whatever rate your bank is currently offering, which can go up or down. This is why some people move money between accounts when rates shift — they chase higher rates at banks that have raised theirs.

Frequently Asked Questions

Can I earn interest on a checking account?

Some checking accounts pay interest, but the rates are almost always lower than savings accounts — often 0.01% to 0.05%. Most people keep their everyday spending money in checking and their longer-term savings in a savings account or money market account to earn more interest. A few online banks offer checking accounts with rates close to savings rates, so it is worth comparing if you want to consolidate.

What is the difference between APY and APR?

APY (annual percentage yield) includes the effect of compounding, so it shows the true amount you will earn over a year. APR (annual percentage rate) does not include compounding and is typically used for loans and credit cards. Always look at the APY when comparing savings accounts, because it reflects what you will actually earn.

Do I lose interest if I withdraw money before the end of the month?

No. Interest accrues daily on the balance in your account, so if you withdraw money mid-month, you earn interest only on the amount that was there. You do not forfeit interest you have already earned. Some accounts have withdrawal limits (like six per month), and exceeding them may trigger a fee, but the interest itself is not lost.

Why is my interest rate lower than what the bank advertises?

The advertised rate is usually for new customers opening an account today. If you opened your account before the bank raised its rates, your old account may still earn the lower rate. You can ask your bank to match the new rate, switch to a new account at the same bank, or move your money to a different bank offering a higher rate.

How much interest will I earn on $5,000?

It depends on the APY and how long the money stays in the account. At 4.5% APY, $5,000 earns roughly $225 per year. At 0.01% APY, it earns about 50 cents per year. Use your bank's interest calculator on its website, or multiply your balance by the APY as a decimal to get a rough estimate.