Your rate depends on the bank, the account type, and how much money you keep in it
The interest rate a bank offers you is not set by law or by some central authority—each bank decides what to pay. Two banks sitting next to each other on the same street can offer completely different rates on the same type of account. The rate you see advertised is what new customers get, but some banks pay higher rates to customers who keep larger balances, and some pay lower rates to customers who keep smaller ones.
The federal government does set a benchmark rate (called the federal funds rate) that influences what all banks pay, but banks are free to offer more or less than that baseline. When the Federal Reserve raises its rate, banks usually raise theirs within weeks or months. When the Fed lowers its rate, banks often lower theirs faster than they raised them.
Right now, rates vary widely. Some online banks offer rates between 4% and 5% on savings accounts, while some brick-and-mortar banks offer less than 0.5%. The difference is real money: on $10,000, the difference between 0.5% and 4.5% is about $400 per year.
Key Takeaways
- Banks set their own rates independently, so comparing offers from multiple banks before opening an account can save you hundreds of dollars per year.
- Online banks typically offer higher rates than traditional banks because they have lower overhead costs, but your money takes one to three business days to move in or out.
- Money market accounts and certificates of deposit (CDs) usually pay more than regular savings accounts, but money market accounts may limit how often you withdraw, and CDs lock your money away for a set time.
- Your rate can change at any time after you open the account—banks are not required to give you advance notice, though many do.
- The amount you keep in the account does not affect the rate at most large banks, but some smaller banks or credit unions pay higher rates only on balances above a certain threshold.
Why online banks pay more than traditional banks
Online banks have no physical branches, no tellers, and no rent on a building in downtown. That lower cost structure means they can afford to pay you more of the interest they earn. A traditional bank with 500 branches across the country has to cover the salary of everyone working in those branches before it can pay you anything.
The tradeoff is speed and convenience. When you deposit a check at an online bank, it takes one to three business days to clear. When you need to withdraw cash, you either use an ATM (and may pay a fee) or wait for a transfer to your checking account at another bank. If you need cash today, a brick-and-mortar bank is faster.
Credit unions—member-owned financial institutions—sometimes split the difference. They often pay rates higher than traditional banks but lower than online banks, and they may have physical locations in your area.
How account type affects what you earn
A regular savings account is the most flexible. You can deposit and withdraw money whenever you want, with no penalty. The tradeoff is that the interest rate is usually the lowest of all the account types a bank offers.
A money market account usually pays more interest than a savings account, but it comes with limits. Most money market accounts let you make only three to six withdrawals per month before you pay a fee. Some banks also require a higher minimum balance to open one—often $2,500 or more. If you need to access your money frequently, a money market account will cost you.
A certificate of deposit (CD) pays the highest rate, but your money is locked away for a set period—usually three months, six months, one year, or five years. If you withdraw before that time is up, you pay an early withdrawal penalty, which is typically a few months' worth of interest. CDs make sense if you know you will not need the money for a specific amount of time.
How much your balance size matters
At most large national banks, the interest rate is the same whether you have $100 or $100,000 in the account. The rate is tied to the account type and the bank's pricing, not to your balance.
Some smaller banks and credit unions use a tiered rate structure, where you earn a higher rate only if your balance stays above a certain level—say, $25,000 or $50,000. If your balance drops below that threshold, your rate drops too. Before opening an account, ask the bank directly whether the rate changes based on your balance, and at what balance level.
What happens when the Federal Reserve changes its rate
When the Federal Reserve raises its benchmark rate, banks usually raise the rates they pay on savings accounts within a few weeks. When the Fed lowers its rate, banks often lower yours faster—sometimes within days. This is because banks are more eager to keep your money when rates are falling and less eager when rates are rising.
Your rate is not may provide to stay the same. Banks can change the rate on your account at any time, though most send a notice in the mail or email a few days before the change takes effect. If a bank lowers your rate and you do not like it, you can move your money to a different bank—there is no penalty for closing a savings account.
How to compare rates before you open an account
Do not open an account based on the rate you see on the bank's homepage. That rate is usually accurate, but it changes frequently, and some banks show different rates to different people based on where they live or how much money they have.
Call the bank directly or use their website to find the current rate for the specific account type you want. Write down the rate, the account type, any minimum balance requirement, and any limits on withdrawals. Then do the same for at least two other banks. The difference between the highest and lowest rate is real money you will earn or lose over time.
Websites that track savings rates across banks can give you a starting point, but verify the rate with the bank itself before you commit. Rates change daily, and a website updated yesterday may not show today's rate.
Why the rate you see advertised might not be the rate you get
Banks sometimes advertise a high rate as a promotion for new customers only. Once you open the account, your rate may drop after a set period—usually three months or six months. Read the fine print on any account you are considering, or ask the bank directly: "Is this rate may provide for how long?"
Some banks also offer different rates based on how you fund the account. If you transfer money from another bank, you might get the advertised rate. If you deposit a check, you might get a lower rate. Again, ask before you open the account.
Frequently Asked Questions
Can I get a higher rate if I have more money in the account?
At most large banks, no—the rate is the same for all customers with that account type. Some smaller banks and credit unions use tiered rates, where you earn more only if your balance stays above a certain level. Ask your bank directly whether balance size affects your rate.
What if I open an account and the rate drops the next week?
Banks can change rates at any time without your permission. You are not locked into the rate you saw when you opened the account. If the rate drops and you do not like it, you can move your money to a different bank with no penalty.
Do I have to pay taxes on the interest I earn?
Yes. Interest earned on a savings account is taxable income. At the end of the year, the bank will send you a form (1099-INT) showing how much interest you earned, and you will report that on your tax return. The amount is usually small unless you have a large balance or a high rate.
Is my money safe if I keep it in an online bank?
Yes, as long as the bank is insured by the FDIC (Federal Deposit Insurance Corporation). Most online banks are FDIC-insured, which means your money is protected up to $250,000 per account type per bank if the bank fails. Check the bank's website to confirm FDIC coverage before you open an account.
Why do some banks offer 5% when others offer 0.5%?
Online banks have lower costs than traditional banks with physical branches, so they can afford to pay more. Banks also compete for customers by offering higher rates. A bank that wants to grow fast will offer a higher rate to attract new deposits. A bank that already has plenty of customers may offer a lower rate.