What banks pay you depends on the account type and the rate they set

Banks pay you interest on money you keep in savings accounts, money market accounts, and some checking accounts. The amount varies widely: a savings account at one bank might pay 4.5% annually while another pays 0.01%. Checking accounts almost never pay interest anymore, though a few banks still offer it. The rate a bank pays is called the Annual Percentage Yield (APY), and it tells you exactly how much you'll earn in a year if you don't withdraw the money.

Banks set their own rates based on what the Federal Reserve does with interest rates, how much competition they face, and how much they need your deposits. When the Fed raises rates, banks usually raise what they pay you within weeks or months. When the Fed cuts rates, banks cut what they pay you much faster—sometimes overnight. Online banks typically pay more than brick-and-mortar banks because they have lower overhead costs.

The money you earn is added to your account automatically, usually monthly or daily depending on the bank. You don't have to do anything to receive it—it just accumulates as long as your money stays in the account.

Key Takeaways

  • Banks pay interest only on savings accounts, money market accounts, and rare checking accounts—not on standard checking.
  • The rate varies by bank and changes when the Federal Reserve adjusts its rates, typically within weeks to months.
  • Online banks usually pay 2 to 5 times more than traditional banks because they have lower operating costs.
  • Interest is calculated daily or monthly and added automatically; you earn it just by keeping money deposited.
  • The APY shown is the actual annual rate you'll earn, already accounting for how often interest compounds.

How interest rates are set and why they change

The Federal Reserve sets a target range for the federal funds rate, which is the rate banks charge each other to borrow overnight. Banks use this as a benchmark when deciding what to pay depositors. When the Fed raises its rate, banks have more incentive to attract deposits, so they raise what they pay you. When the Fed cuts rates, banks cut what they pay you because they need fewer deposits.

The lag between a Fed rate change and a bank rate change is usually two to eight weeks for savings accounts. Some banks move faster than others. Online banks tend to raise rates quickly when the Fed moves up, but they also cut rates quickly when the Fed moves down. Traditional banks sometimes lag behind on both directions.

Banks also look at how much competition they face in your area and how much deposit money they currently have. A bank that needs more deposits might pay a higher rate to attract them. A bank that already has plenty of deposits might pay less.

Savings accounts versus money market accounts versus checking

Savings accounts are the most common way to earn interest. You can withdraw money anytime without penalty, though federal rules once limited you to six withdrawals per month (that rule was suspended in 2020 and has not been reinstated). Interest rates on savings accounts currently range from 0.01% to 5.35% depending on the bank, with online banks typically paying 4% to 5.35% and traditional banks paying under 0.5%.

Money market accounts are a hybrid between savings and checking. They pay interest like savings accounts but come with a debit card and check-writing privileges. Interest rates are usually similar to savings accounts at the same bank, sometimes slightly higher. The tradeoff is that some money market accounts have higher minimum balance requirements or monthly fees.

Checking accounts rarely pay interest anymore. Most major banks pay 0.01% or nothing at all on checking. A small number of online banks and credit unions still offer checking accounts that pay 1% to 2%, but these usually require direct deposit, a minimum balance, or a certain number of debit card transactions per month.

How to calculate what you'll actually earn

The APY already includes the effect of compounding, so you don't have to do math yourself. If a bank shows an APY of 4.5% on a savings account, that's what you'll earn in a year if you deposit $1,000 and don't touch it. After one year, you'll have $1,045.

Interest compounds daily at most banks, meaning the bank calculates interest on your balance each day and adds it to your account. The next day, interest is calculated on the new, slightly higher balance. This compounds throughout the month and year. The APY already accounts for this compounding, so the number you see is the true annual return.

If you deposit money partway through the year or withdraw money partway through, you earn a proportional amount. If you deposit $1,000 on July 1 in an account paying 4.5% APY, you'll earn roughly $22.50 by December 31 (half a year's worth of interest).

Why online banks pay more than traditional banks

Online banks have no physical branches, no tellers, and no expensive real estate. Their operating costs are a fraction of what a traditional bank spends. Because they spend less to run the business, they can afford to pay more of what they earn to depositors. A bank that pays 4.5% APY on savings is still profitable; a traditional bank paying the same rate would lose money.

Online banks also face intense competition with each other. When one raises its rate, others follow within days to avoid losing customers. Traditional banks face less direct competition because customers often stay with their local branch out of habit or convenience.

The tradeoff is that online banks offer fewer services. You can't walk into a branch, deposit cash easily, or talk to someone in person. Most online banks let you deposit checks by phone camera and withdraw cash at ATMs in their network, but the experience is different from a traditional bank.

FDIC insurance and what happens if the bank fails

The Federal Deposit Insurance Corporation (FDIC) insures deposits at member banks up to $250,000 per account holder per bank. This means if the bank fails, you get your money back up to that limit, including any interest you've earned. The insurance is automatic—you don't have to sign up or pay for it.

If you have more than $250,000 at one bank, the amount over $250,000 is not insured. If you want to insure more than $250,000, you can open accounts at different banks or use different account types (a savings account and a checking account at the same bank are insured separately, for example).

Bank failures are rare. The FDIC has insured deposits since 1933, and the last major bank failure was in 2023. Your money is safer in an FDIC-insured account than in a mattress or an uninsured investment.

Minimum balances, fees, and other costs that reduce what you earn

Some banks charge monthly maintenance fees on savings accounts, typically $5 to $15. If you earn $3 in interest but pay a $10 monthly fee, you've lost money. Always check the fee schedule before opening an account. Many online banks charge no monthly fees, which is one reason they're often a better deal than traditional banks.

Some accounts have minimum balance requirements. If your balance falls below the minimum, you might pay a fee or lose the higher interest rate. A few banks waive the fee if you set up direct deposit or maintain a certain balance in another account at the same bank.

Overdraft fees, if you go negative, are separate from interest earnings and can be substantial ($30 to $35 per overdraft at many banks). These fees don't affect the interest rate itself, but they reduce your net earnings if you overdraft frequently.

Frequently Asked Questions

Do I have to pay taxes on interest I earn from a savings account?

Yes. Interest income is taxable as ordinary income. Banks send you a 1099-INT form each January if you earned $10 or more in interest during the previous year. You report this on your tax return. The interest is taxed at your regular income tax rate, not at a lower capital gains rate.

What's the difference between APY and APR?

APY (Annual Percentage Yield) includes the effect of compounding and is what you actually earn. APR (Annual Percentage Rate) does not include compounding and is used mainly for loans and credit cards. For savings accounts, always look at the APY, not the APR.

Can I move my money to a higher-paying bank without losing interest?

Yes. Interest accrues daily, so you earn it right up until you withdraw. When you move to a new bank, you don't lose any interest you've already earned. You'll receive a 1099-INT for the interest earned at the old bank in the year you earned it, regardless of when you withdrew the money.

Will my interest rate stay the same forever?

No. Banks change rates frequently, usually in response to Federal Reserve decisions. A rate that's 4.5% today might drop to 3.5% in six months if the Fed cuts rates. Some banks cut rates faster than others. If your rate drops and you want a higher rate, you can move your money to a different bank.

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

You earn interest only on the money that was actually in the account. If you deposit $1,000 on January 1 and withdraw $500 on June 30, you earn interest on $1,000 for six months and $500 for the remaining six months. Interest is calculated daily, so you don't lose anything by withdrawing partway through the year.