Interest is how a bank pays you to keep money there

When you deposit money into a savings account, the bank lends that money to other customers through mortgages, car loans, and business lines of credit. In exchange for the use of your money, the bank pays you interest—a percentage of your balance, calculated and added to your account on a set schedule. The interest rate your bank offers depends on the current economic environment, the type of account you hold, and how much money you have deposited.

Interest accrues either daily, monthly, or quarterly, depending on your account terms. Most banks compound interest, meaning they calculate interest on your original balance plus any interest already earned. Over time, this compounding effect means your money grows faster than it would with simple interest alone.

The amount you earn is not may provide to stay the same. Banks can raise or lower their rates at any time, and rates often move in response to changes set by the Federal Reserve. You will see your current rate listed in your account agreement or online banking portal, but that rate may change after you open the account.

Key Takeaways

  • Interest rates on savings accounts vary by bank and account type, and most banks can change their rates without notice.
  • High-yield savings accounts typically offer rates 10 to 20 times higher than traditional savings accounts at large banks.
  • Money market accounts and certificates of deposit (CDs) offer higher rates than savings accounts but come with restrictions on how often you can withdraw.
  • The amount you earn depends on your balance, the interest rate, and how often interest compounds—usually daily or monthly.
  • Online banks and credit unions often offer better rates than brick-and-mortar banks because they have lower operating costs.

High-yield savings accounts pay significantly more than standard accounts

A high-yield savings account is a savings account offered by online banks or some credit unions that pays a much higher interest rate than a traditional savings account. As of late 2024, high-yield accounts at online banks pay between 4% and 5.35% annually, while savings accounts at large national banks typically pay 0.01% to 0.05%. The difference compounds quickly: on a $10,000 balance, a high-yield account earning 5% would add $500 per year, while a traditional account earning 0.01% would add $1.

High-yield accounts work exactly like regular savings accounts—you can deposit and withdraw money whenever you want, and your deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The main trade-off is that high-yield accounts are offered only by online banks, which means you cannot walk into a physical branch. Most online banks allow you to transfer money in and out through your existing bank account, and transfers usually clear within one to three business days.

The rates on high-yield accounts change frequently. Banks raise rates when the Federal Reserve raises its benchmark rate and lower them when the Fed cuts rates. If you open a high-yield account, check the rate again in a few months to see whether it has moved, and compare it to rates at other banks. Some banks lower their rates more aggressively than others when the economic environment shifts.

Money market accounts combine checking features with higher interest rates

A money market account is a hybrid between a checking account and a savings account. It typically pays interest higher than a regular savings account but lower than a high-yield savings account—usually between 4% and 5% as of late 2024. In exchange for the higher rate, money market accounts usually limit the number of withdrawals you can make per month, often to three to six. Some money market accounts also come with a debit card or checkbook, so you can access your money more easily than you can with a traditional savings account.

Money market accounts are useful if you want to earn more interest than a regular savings account offers but also want the flexibility to write checks or use a debit card occasionally. They work well for an emergency fund or money you plan to keep for several months but might need to access quickly. Like high-yield savings accounts, money market accounts at online banks typically pay more than those at large national banks.

The withdrawal limits on money market accounts are set by the bank, not by federal law, so different banks have different rules. Before you open one, read the account agreement to understand how many withdrawals you get per month and what happens if you exceed that limit—some banks charge a fee, while others simply freeze the account temporarily.

Certificates of deposit lock your money away for a may provide rate

A certificate of deposit (CD) is an account where you agree to leave your money untouched for a set period—usually three months, six months, one year, or five years. In exchange, the bank guarantees you a fixed interest rate for that entire period, regardless of whether rates rise or fall. CD rates are typically higher than savings account rates: a one-year CD might pay 4.5% to 5.3%, while a five-year CD might pay 4.8% to 5.5%, depending on the bank and economic conditions.

The trade-off is that you cannot withdraw your money before the CD matures without paying a penalty. Penalties vary by bank and by CD term—a three-month CD might charge a penalty equal to one month of interest, while a five-year CD might charge a penalty equal to six months or a year of interest. If you withdraw early, the penalty is deducted from your earnings or your principal. CDs make sense only if you know you will not need the money for the full term.

CDs are useful for money you have set aside for a specific goal months or years away—a down payment on a house, a car purchase, or a planned vacation. Because the rate is locked in, you do not have to worry about rates dropping and reducing your earnings. Online banks typically offer higher CD rates than brick-and-mortar banks, and rates vary significantly between banks, so it pays to compare before you commit.

The interest rate environment affects how much you earn

Interest rates on savings products move in response to decisions made by the Federal Reserve, which sets a benchmark rate that influences rates across the entire economy. When the Fed raises its benchmark rate, banks typically raise the rates they offer on savings accounts, money market accounts, and CDs. When the Fed cuts its benchmark rate, banks usually lower the rates they offer. This means the amount you earn on your savings can change significantly over time, even if you do nothing.

If you lock money into a CD when rates are high, you protect yourself against future rate cuts—your rate stays the same for the full term. If you keep money in a high-yield savings account or money market account, your rate will move up and down with the market, which means you benefit if rates rise but earn less if rates fall. There is no perfect choice; it depends on whether you think rates will rise or fall and how long you can afford to lock your money away.

You can track the Federal Reserve's current benchmark rate on the Federal Reserve's website. Most financial news outlets also report on Fed rate decisions and what economists expect to happen next. Checking these sources occasionally helps you understand why your bank's rates have changed and whether it might be a good time to move money to a different account type or bank.

Compare rates across banks to maximize your earnings

Because interest rates vary significantly between banks, moving your money to a bank with a higher rate can add hundreds or thousands of dollars to your earnings over time. A $50,000 balance earning 0.05% at a large national bank earns $25 per year, while the same balance earning 5% at an online bank earns $2,500 per year—a difference of $2,475. Even smaller differences add up: moving from 4.5% to 5% on a $10,000 balance adds $50 per year.

To compare rates, visit the websites of several banks and note their current rates for the account type you want. Many financial websites also publish tables comparing rates across banks, updated weekly or daily. When you compare, pay attention to whether the rate applies to all balances or only balances above a certain amount—some banks offer their highest rate only on accounts with $25,000 or more. Also check whether there are any monthly fees that would reduce your earnings.

Once you find a bank with a better rate, opening an account usually takes 10 to 15 minutes online. You will need your Social Security number, a government-issued ID, and your current bank account information if you want to transfer money electronically. After you open the account, you can move money from your old bank to the new one through an electronic transfer, which typically takes one to three business days.

Frequently Asked Questions

How often does interest get added to my account?

Most banks compound interest daily and credit it to your account monthly. This means interest is calculated on your balance every day, but you see the money added to your account once a month. Some banks compound and credit quarterly or annually, which means you earn slightly less because the interest does not compound as often. Check your account agreement to see your bank's schedule.

What happens to my interest if I withdraw money before the month ends?

For savings accounts and money market accounts, you keep all the interest you have earned up to the day you withdraw. Interest is calculated on your daily balance, so if you have $10,000 for 20 days and then withdraw $5,000, you earn interest on $10,000 for 20 days and $5,000 for the remaining days of the month. For CDs, withdrawing early triggers a penalty that reduces your earnings.

Is my money safe if I keep it in a high-yield savings account at an online bank?

Yes, as long as the bank is FDIC-insured, which nearly all online banks are. FDIC insurance protects your deposits up to $250,000 per account type per bank. You can verify a bank's FDIC status on the FDIC's website. Online banks are regulated the same way as brick-and-mortar banks, and your money is just as safe.

Can a bank lower my interest rate without warning?

Yes. Banks can change the rates on savings accounts and money market accounts at any time without notice. For CDs, your rate is locked in for the full term and cannot change. If your bank lowers its rate significantly, you can move your money to a different bank that offers a higher rate.

What is the difference between APY and APR?

APY stands for annual percentage yield and includes the effect of compounding. APR stands for annual percentage rate and does not. When comparing savings accounts, always look at the APY, because that is the actual amount you will earn. Banks are required to display APY prominently in their account disclosures.