What savings accounts pay right now

Savings account interest rates vary widely depending on the bank and the type of account. As of early 2024, traditional brick-and-mortar banks typically pay between 0.01% and 0.05% annual percentage yield (APY), while online banks and credit unions often pay between 4% and 5.35% APY. The difference matters: on $10,000, a 0.01% rate earns $1 per year, while a 5% rate earns $500 per year.

The rate your bank offers depends on several factors: the current federal funds rate (which the Federal Reserve sets), how much money you deposit, how long you keep it there, and whether the account has special conditions. Some accounts pay higher rates only on balances above a certain threshold, or only for the first few months. Rates change frequently—sometimes weekly—so the number you see today may not be the number you get next month.

You can find current rates by visiting bank websites directly, using rate comparison sites, or calling the bank's customer service line. Most banks display their APY prominently on the account details page. The APY already includes the effect of compounding (interest earned on interest), so it is the number to compare across banks.

Key Takeaways

  • Online banks and credit unions currently pay 4% to 5.35% APY on savings accounts, while traditional banks typically pay 0.01% to 0.05%.
  • The rate you receive depends on the bank's choice, the federal funds rate, your account type, and sometimes the size of your deposit.
  • APY includes the effect of compounding, so it is the only number you need to compare rates across different banks.
  • Rates change frequently and are not locked in, so the rate you open an account with may be lower six months later.
  • High-yield savings accounts at online banks offer the highest rates but may have longer transfer times or fewer physical branches than traditional banks.

How banks decide what rate to offer

Banks set their savings rates based primarily on the federal funds rate, which is the interest rate the Federal Reserve charges banks to borrow from each other overnight. When the Fed raises this rate, banks have more incentive to offer higher rates to depositors because their own borrowing costs go up. When the Fed lowers the rate, banks typically lower deposit rates as well.

The second factor is competition. Online banks with low overhead costs can afford to pay higher rates than brick-and-mortar banks because they spend less on branches and staff. Credit unions, which are member-owned rather than profit-driven, sometimes pay higher rates as a benefit to members. If a bank wants to attract deposits, it raises its rate; if deposits are flowing in anyway, it may lower the rate.

A third factor is the type of account. Money market accounts sometimes pay slightly higher rates than regular savings accounts. Certificates of deposit (CDs) pay fixed rates that are locked in for a set term—usually higher than savings account rates because your money is tied up. Promotional rates, offered to new customers for a limited time, are often much higher than the standard rate but drop after the promotional period ends.

How interest compounds and when you receive it

Interest compounds, meaning you earn interest on the interest you have already earned. Most savings accounts compound daily, which means the bank calculates interest on your balance every single day and adds it to your account. Some accounts compound monthly or quarterly, which results in slightly less total interest over time.

The frequency of compounding is already factored into the APY, so you do not need to calculate it yourself. If a bank advertises 5% APY with daily compounding, that 5% is the actual annual return you will receive, not a starting point for further calculation.

Interest is usually credited to your account monthly, though some banks credit it daily or quarterly. Crediting means the interest is added to your balance and becomes part of your account. Once credited, that interest begins earning interest itself in the next compounding period. You do not have to do anything to receive the interest—it happens automatically.

Why rates differ so much between banks

The largest difference is between online banks and traditional banks. Online banks have no physical branches, no tellers, and no local advertising costs. They pass these savings to customers by paying higher rates on deposits. A customer at an online bank accepts that they cannot walk into a branch or speak to someone in person; in exchange, they earn significantly more interest.

Credit unions often pay higher rates than traditional banks because they are not trying to maximize profit for shareholders. Instead, they return earnings to members through better rates and lower fees. However, credit unions are smaller and may have fewer ATMs or branches than national banks.

Traditional banks pay lower rates because they have higher operating costs and because many customers prioritize convenience (nearby branches, phone support, brand recognition) over interest rate. A customer who values the ability to walk into a branch and speak to a person in person will accept a lower rate in exchange for that service.

What happens when the Federal Reserve changes rates

When the Federal Reserve raises the federal funds rate, banks typically raise savings account rates within days or weeks. The increase is not automatic—banks choose how much of the Fed's increase to pass along to depositors. Some banks raise rates quickly and by the full amount; others raise rates slowly or by a smaller amount.

When the Federal Reserve lowers the federal funds rate, banks lower savings account rates much faster—sometimes within days. Banks are eager to reduce what they pay depositors when their own borrowing costs fall. This asymmetry means that if you lock in a high rate during a period of high Fed rates, you benefit if the Fed later lowers rates, because your rate may not drop as quickly as new accounts' rates.

The Federal Reserve does not set savings account rates directly. It only sets the federal funds rate, which is the rate banks charge each other. Individual banks decide how much of that change to pass along to customers. This is why two banks may have very different rates even when the Fed rate is the same.

How to compare rates across banks

Start by looking at the APY, not the interest rate. APY already includes compounding, so it is the true annual return. A bank advertising "5% interest" and another advertising "5% APY" may not be the same if one compounds daily and the other compounds annually, though in practice most banks now advertise APY.

Check whether the rate applies to your deposit size. Some banks pay 5% APY only on balances up to $25,000, then 4% on anything above that. Others pay the same rate on all balances. If you have $100,000 to deposit, a bank that pays 5% on the first $25,000 and 3% on the rest is not as good as one that pays 4.5% on everything.

Look at how long the rate lasts. Promotional rates often apply only to new customers and only for the first three to six months. After that, the rate drops to the standard rate, which may be much lower. If you plan to keep the account open for years, the long-term rate matters more than the promotional rate.

Consider the bank's other features: whether it has a mobile app, how quickly transfers take, whether there are monthly fees, and what the minimum deposit is. A slightly lower rate at a bank with better service may be worth it to you. A slightly higher rate at a bank with poor service may not be.

What to watch out for

Rates are not may provide. A bank can lower your rate at any time, usually with 30 days' notice. If you open an account at 5% APY, the bank can drop it to 4% next month if it chooses. This is different from a CD, where the rate is locked in for the full term. With a savings account, the rate can change whenever the bank decides.

Some banks advertise a high rate but apply it only to new customers or only for a limited time. Read the fine print to see whether the rate you see is the permanent rate or a promotional rate. The permanent rate is what you will earn after the promotion ends.

Beware of accounts with conditions you may not meet. Some banks pay high rates only if you make a certain number of debit card purchases per month, or only if you have direct deposit set up. If you do not meet the condition, the rate drops to a much lower level. Make sure you understand the conditions before you open the account.

Frequently Asked Questions

Can a bank lower my interest rate after I open the account?

Yes. Banks can change savings account rates at any time with typically 30 days' notice. The rate is not locked in like it is with a CD. If you want a may provide rate for a set period, open a CD instead of a savings account.

Is the interest I earn on a savings account taxable?

Yes. Interest earned on a savings account is taxable income. If you earn $500 or more in interest in a year, the bank will send you a 1099-INT form for tax purposes. You report this interest on your tax return.

What is the difference between APY and APR?

APY (annual percentage yield) includes the effect of compounding and is used for savings accounts and CDs. APR (annual percentage rate) does not include compounding and is used for loans and credit cards. For savings accounts, use APY to compare rates.

Why do online banks pay more interest than big banks?

Online banks have lower operating costs because they have no physical branches or tellers. They pass these savings to customers through higher interest rates. Traditional banks charge for the convenience of in-person service.

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

Interest is calculated on your average daily balance throughout the month, so withdrawing money mid-month reduces the interest you earn that month. You still receive interest on the money you had on deposit; it is just less because your balance was lower.