Why Are Interest Rates So Low on My Savings Account?

Why Is Interest on My Savings Account So Low?

Although savings accounts tend to offer a higher annual percentage rate (APY) than checking accounts, the rate on your savings account could still be very low. There's no specific formula or rule for when banks and credit unions have to change rates. As a result, it tends to depend on the companies' goals and market forces.

If your APY seems significantly lower than other rates you're seeing on savings accounts, you probably have a traditional savings account, perhaps one you've held at your bank for many years. Traditional savings accounts tend to offer much lower rates than other types of savings accounts, such as high-yield savings accounts and certificates of deposit (CDs).

Banks and credit unions consider complex tradeoffs before changing the interest rate on their savings account because:

• They need customer deposits to make loans and earn interest.
• If they don't raise rates, customers might move to a competitor that offers a higher rate.
• If they raise rates, their profits from the loans decrease.

There are non-interest earnings to consider as well, such as earnings from checking and savings account fees. Plus, the cross-selling opportunities are added into this equation—you might be more likely to open a credit card or take out a mortgage with the bank where you keep your savings.

In general, when interest rates rise:

• Online-only banks and fintechs tend to quickly increase the APY on their savings accounts, perhaps because their competitors are raising rates and vying for the same depositors' money.
• Traditional financial institutions are often much slower to respond, if they raise rates at all. They may have "stickier" customers who are less likely to withdraw savings or close an account.

All this is to say your bank might have low rates because it ran the numbers and doesn't think raising rates will pay off. After all, many people keep their savings account even if it doesn't offer the best APY.

Rates Might Stay Low Because Depositors Don't Leave

An Experian survey from May 2023 shines some light on why people don't open a new savings account even if their current account has a low APY:

• 40% of consumers say they don't switch because they don't have enough savings to make it worthwhile
• 30% didn't realize they should change savings accounts to earn more interest
• 29% say it's too inconvenient or they're too busy
• 20% didn't have a reason or didn't share a reason

Additionally, some people might not want to switch accounts because they don't want to lose bank benefits that come with large balances, they feel loyal to their bank or they like having all their accounts in one place.

How Can I Get a Better Interest Rate on My Savings Account?

There are a lot of reasons why people don't switch savings accounts, but here are three good reasons to consider a change:

• Opening a new account can be quick and easy, especially for online-only savings accounts.
• Many accounts don't have minimum balance requirements, and you don't need to transfer all your money to the new account.
• Even a small APY increase can add up as the interest earnings compound over time.

If you're looking for a better rate, compare current APYs on different accounts to see which is best. Online-only banks and credit unions tend to offer high-yield savings accounts with higher APYs and lower fees than branch-based financial institutions. And most are members of the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA), meaning your savings are insured up to the federal limits.

What to Consider Before Moving Your Savings

Opening a new savings account can be the best way to increase your interest earnings, and you can earn extra money and avoid mishaps if you:

• Review account terms, conditions and fees before making a change.
• If you froze your ChexSystems file, unfreeze it before applying.
• Look for bank account bonuses that can increase your earnings.

It might only take you a few minutes to open a new savings account, but sometimes it can take longer if you need to visit a branch. After your account is open, it might take a few days to transfer money between your accounts.

If you're completely switching banks, update all your related transactions, including direct deposits, bill pays and automatic transfers. You don't have to worry about this if you're only opening a new account for part of your savings, but be mindful of how much money stays in your primary account to avoid accidentally overdrafting.

Also, beware that your new rate isn't guaranteed—the bank could lower it at any time. Some banks even offer a high APY to attract new customers, then lower the rate on that account and launch a different type of savings account with a high rate. If you're not paying attention, you could be right back where you started.

Alternatives to Savings Accounts

Savings accounts aren't the only option if you're looking for a safe place to store your money and earn interest. Here are four alternatives to consider:

• Money market accounts: Money market accounts (MMAs) are like a hybrid between a checking and savings account. They tend to offer higher APYs than checking accounts and you can easily spend the money with a debit card or check. But MMAs tend to have high balance requirements, and they don't necessarily offer better rates than a high-yield checking account.
• Money market fund: Money market funds (MMFs) are investments rather than deposit accounts. There are several types of MMFs that you can invest in using a brokerage account, including government, municipal and general purpose MMFs. These mutual funds try to keep shares at $1 each while paying out monthly dividends, and they're often considered relatively safe investments.
• Certificates of deposit (CDs): CDs are a type of deposit account that often offer a higher APY than savings accounts from the same financial institution. In exchange, you agree to keep your money in the CD for a specific period—the APY you receive can depend on the period you choose and amount you lock up. There are several types of CDs, and these can be good options for short- to medium-term savings goals.
• High-yield checking accounts: There are also high-yield and reward checking accounts that offer interest or other perks, such as rewards on debit card purchases. Some even offer higher APYs than you can get on savings accounts elsewhere, but you may need to meet monthly requirements to qualify.

The Bottom Line

When interest rates rise, some financial institutions will increase the APY on their savings accounts to match. But if your bank or credit union hasn't raised its rates, you might be able to earn significantly more interest by opening a new account elsewhere. It's often an easy process―especially if you choose an online-only account―and you don't need to move all your money to benefit.