How Does a High-Yield Savings Account Work

Breaking Down This High-Reward, Low-Risk Saving Option

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Once you have a few extra dollars in your checking account, you may start to wonder how you can make the most of it. Inflation is real and you’ll fall behind if your money isn’t growing. That’s where a savings account comes in, as it can offer you interest on your account balance. 

Many believe high-yield savings accounts are even better because they offer you more in return—but what’s the catch? In most cases, these accounts offer mostly upsides. Here’s what you should know.

Key Takeaways

  • High-yield savings accounts offer annual percentage yields (APYs) four to 10 times higher than traditional savings accounts. 
  • Online-only savings accounts usually offer the highest APYs.
  • When shopping for a high-yield savings account, be sure to compare the APYs, deposit requirements, balance requirements, and fees. 
  • Alternatives include CDs, money market accounts, and stocks. 

What Is a High-Yield Savings Account?

A high-yield savings account is a savings account that offers to pay you more interest than a traditional savings account. Whereas a traditional savings account offered an average annual percentage yield (APY) of about 0.06% for most of 2021, the APYs of high-yield savings accounts were in the range of 0.25% to 0.70% according to data collected by The Balance.

The highest-yield savings accounts are often found at online-only banks.

How High-Yield Savings Accounts Work

The availability of high-yield savings accounts has increased as more companies offer online-only accounts. The lower overhead costs enable higher payouts for account holders. However, before opening a high-yield savings account, there are a few things you should know. While the APY is an important factor to consider, there are other account details that will come into play.

Minimum Deposit and Ongoing Balance Requirements 

Some accounts require you to deposit a minimum amount to receive the APY. You might also need to maintain a minimum balance or not exceed a maximum balance on an ongoing basis. For example, an account might offer a 0.70% APY for accounts with daily balances between $0 and $10,000. However, once your daily balance rises above $10,000, your APY may drop to 0.45%. It’s important to figure out if the requirements work well for you; otherwise, you may not get the full benefit from a particular APY rate.

Fees

Another factor to consider are any account fees. While some savings accounts are free of fees, others come with a monthly maintenance fee. These ultimately take away from any yield you may earn.

Interest Payouts

Speaking of interest yields, you may be wondering when you’ll get paid. Interest calculations and payouts are left up to the bank, so you’ll want to read the fine print before signing up for an account.

In many cases, interest accrues daily and is paid out monthly. For example, Affirm calculates interest each day using what’s called the daily balance method (1/365th of your APY multiplied by your balance at the end of each day). 

Further, the interest may compound, which means you’ll earn interest on the interest you earn. It may sound complicated, but here’s a simple example: If you have $1,000 in your savings account and a 1% APY, an account with compound interest would earn you an extra 5 cents after the first year ($1,010.05 vs. $1,010), and an extra $5.12 after 10 years ($1,105.12 vs. $1,100). While simple interest means you only earn interest on the money you deposit, compounding interest means your money will continue growing over time.

Restrictions on Withdrawals

While suspended due to COVID-19, the federal law known as Regulation D normally limits savings accounts to a maximum of six transfers or withdrawals per account statement cycle. Typically, if you try to exceed the six transaction limit, you could face account closure or fees. Banks may still have these requirements in place but they are not currently mandated by law. So if you need to withdraw funds more frequently than six times per month, check with your institution. You may want to keep some of your money in an account that’s more accessible.

Examples of High-Yield Accounts

The Balance tracks rates offered by more than 150 banks and credit unions, along with their balance requirements and fees. If you look at the best savings account interest rates, you can see examples of high-yield accounts on offer now. The best account for you will be one with a high APY, low to no fees, and deposit or balance requirements that suit your needs.

How To Open a High-Interest Savings Account

Once you find the right high-yield savings account, here’s what to expect during the sign-up process:

  • Set up an account: Most of the high-yield accounts will be online-based so you’ll need to start by creating an online account with the company. This process typically requires your name, email address, password, and phone number. Most companies will send a verification code to your mobile phone that you must confirm. You may also need to agree to an electronic communication disclosure information and consent form.
  • Provide personal identifying information: Federal law requires financial institutions to verify your identity when opening an account. To do so, you’ll need to provide some combination of the following: your Social Security number, date of birth, residential address, and existing bank account information. Your credit report may also be checked as part of the verification process, but it’s often a soft inquiry, which means it won’t impact your credit score.
  • Open the account: Once verified, you’ll have your new savings account and can start earning.

Alternatives to High-Yield Savings Accounts

Wondering if a high-yield savings account is the best option for you? Here are some alternatives that can also help you earn interest while keeping your funds relatively liquid.

Money Market Accounts

Money market accounts (MMA) are similar to high-yield savings accounts in that they offer APYs much higher than a traditional savings account, and have variable rates that fluctuate with the market. When Regulation D is in effect, MMAs are limited to six withdrawal or transfer transactions per month. One key difference, however, is that money market accounts often have higher deposit and ongoing balance requirements. The APY range also tends to be a bit higher than high-yield savings accounts.

Certificates of Deposit

Certificates of deposit (CDs) are another option in which you can deposit a required amount and leave it for a specified time to get a profitable return. If you need to withdraw your money before the term is over, you will often have to pay an early withdrawal fee, which can reduce or offset any earnings.

The CD term lengths can range anywhere from three to 60 months or even 120 months. The longer the term, the higher the APY. CDs can be a good option for you if you don’t need access to your money for some time.

CD APYs don’t typically start to outperform many high-yield savings accounts until you get into the 18-month or longer CD terms.

Stocks

Investing in the stock market is an option that dangles the carrot of much higher returns than a savings account. However, they come with higher risk, too. While you stand to earn up to an average of 10% in annual returns by investing in stocks long term, nothing is guaranteed. It’s often best to build an emergency fund that you keep in a savings account first. Then consider investing additional funds in stocks with the help of a trusted advisor.

Choosing a High-Yield Savings Account That’s Right for You

A high-yield savings account is often very easy to set up online and can help you start earning interest right away. To get the best returns, shop around. Look for an institution with a competitive APY, suitable balance and deposit requirements, low fees, and a good reputation with past account holders.

While rates can fluctuate over time with the market, it’s best to start with a bank that’s offering a competitive rate. If you find the rate becomes less competitive over time, you can shop around and move your savings to another bank. Institutions know this, so many will try to remain as competitive as possible.

Frequently Asked Questions (FAQs)

What is the difference between a high-yield savings account and a CD account?

While both CD and high-yield savings accounts can help you to earn returns on your money, they work a bit differently. CD accounts require you to leave your money in the account for a certain amount of months or years to earn the return. High-yield savings accounts don’t have a time requirement. Instead, you earn the APY based on how much money is in the account—but because of that flexibility, they may pay lower rates than CDs.

Can you get a high-yield savings account without a credit check?

You may be able to get a high-yield savings account without a credit check. A savings account is a low-risk financial account; since the company is not lending you money, it often won’t have any strict credit eligibility requirements. However, many financial institutions will run a soft credit check as part of their identity verification process. They may also check your report with ChexSystems, which contains information on your closed checking and savings accounts.

How often can banks change the interest rate on my savings account?

Most savings accounts have variable rates, so the APY can go up and down as often as the bank wants to change it. In most cases, fluctuations will be in response to changes in the federal funds rate, which depend on market conditions.

Article Sources

  1. FDIC. “National Rates and Rate Caps.” Accessed Dec. 10, 2021.

  2. Capital One. ”Why Do Banks Pay Interest?” Accessed Dec. 10, 2021.

  3. The Federal Reserve. “Regulation D Reserve Requirements.” Accessed Dec. 10, 2021.