Is a Better Savings Rate Worth Changing Banks?
Potential Downsides to Chasing the Highest Interest Rates
When your savings account pays almost nothing in interest, it’s smart to explore alternatives. Changing banks for a higher rate can help you grow your cash faster, but make sure you’ll come out ahead before you go to the trouble of switching banks.
Why Do People Seek Better Savings Rates?
Your bank or credit union is a safe place to keep idle cash, and interest earnings make your money grow. Banks lend your savings out to other customers, allowing them to earn revenue off your money. In return, they pay you a portion of what they charge, which encourages you to keep your money on deposit.
The annual percentage yield (APY) tells you how much you earn on your savings, expressed as a yearly return. That number can help you compare banks, and the higher the APY, the better (all other things being equal).
The average APY at banks nationwide is 0.05%, but you can certainly earn more than that. Some of the best savings accounts pay 0.70% APY or more. Alternatively, if you open a certificate of deposit (CD) for at least one year, you can earn over 1% APY with some institutions. To put that in context, assume you have $5,000 in savings:
- At 0.05% APY, you earn $2.50 per year.
- At 0.70% APY, you earn $35 per year.
That’s a big difference, and that’s why it’s important to earn a competitive rate on your savings. Online banks often have relatively high rates, and some community banks and credit unions also compete for your savings.
To help you find accounts easily, we created a list of the best savings accounts with weekly rate updates.
Factors to Consider Before Switching Accounts
When does it make sense to pursue a higher rate on your savings? Several factors can help you decide.
How Much Do You Have to Save?
One of the most important considerations is your account balance. If you have a substantial amount in savings, the rate matters more. For example, as with the example above, assume you can earn an extra 0.65 percentage point on your savings at a different bank. If you have $5,000 in savings, you’ll get an extra $32.50 per year by switching, assuming rates don’t change. But with $45,000 in savings, your earnings increase by $292.50.
Ultimately, you have to decide if chasing rates is worth your time. For $32.50, it might or might not be worth the effort of filling out an application, transferring money, and getting familiar with a new bank. But for $292.50, the higher rate becomes more appealing. Some of the other factors below can help finalize your decision.
Minimum Deposit Requirements
The size of your account balance might also determine which accounts are available to you. For example, Customers Bank in early November paid 0.80% APY on balances of $25,000 or more in the Ascent Money Market account. You earn nothing if your balance falls below that level, so it’s crucial to read the fine print and choose banks that are a good fit for your finances.
Sometimes banks advertise unusually high rates to gather new deposits, but the rate is a promotional rate that will drop after a limited time. In those cases, at least you receive advance notice that the teaser rate won’t last forever. Examine the footnotes and read all bank disclosures carefully whenever you’re thinking of opening an account.
Likelihood of Rate Changes
Banks change their interest rates regularly. The Balance tracks banks and credit unions with the best interest rates, and if you do the same, you’ll notice that the top-ranked banks change positions frequently. If you choose a bank because it has the highest rate, you need to prepare yourself for this reality: You won’t have the highest rate for long, and your rate may eventually become downright unimpressive. How willing are you to change banks if your bank stops competing for deposits?
Balance Caps and Tiered Rates
Look closely at how banks pay interest on your balance. You earn an extraordinarily high rate in some cases—but caps and tiers can limit your earnings. For example, SmartyPig in mid-November paid 0.80% APY on your first $10,000. After that, you earn lower rates on subsequent, larger tiers. If you have a substantial amount in savings, do the math to figure out how much you’ll actually earn after taking your entire balance into account.
Should I Switch Banks to Get a Higher Rate?
Now that you know the issues, here’s when it makes the most sense to go for a better interest rate:
- Your current bank pays almost nothing.
- The difference in interest earnings—in dollars, not just the APY—is worth the time and effort required to switch.
- You’re comfortable opening accounts and transferring money to new banks.
- You have the time and energy to monitor rates at your bank and competing institutions.
- You’re willing to change banks repeatedly, if necessary.
Alternatives to Savings Accounts
If you’re looking to earn more on your cash, you might not need to switch banks. Or, if you do change banks, another savings account might not be your best option. Explore alternative savings vehicles that might pay more on your money.
Certificates of Deposit (CDs)
If you can lock up your savings for an extended period, a CD might pay more than your savings account. Banks often pay higher rates on CDs in exchange for your commitment to leave money untouched. You might need to select a relatively long term, such as 12 months or more, to earn an attractive rate. To learn how much you can earn, see our list of the best CD rates.
Money Market Accounts
Sometimes money market accounts pay attractive rates. A money market account is similar to a savings account (and at some banks, there’s virtually no difference), so include those options in your search. Traditional money market accounts allow you to spend from your account, although banks and credit unions limit how often you can do so. For example, you might be able to schedule bill payments or spend with a debit card three or six times per month.
Standard checking accounts don’t pay interest, but “rewards” checking accounts pay surprisingly high rates. For example, some banks pay 3% or more on your balance, but they limit the balance that earns the highest rate (the maximum might be $15,000 or so, depending on the bank). Plus, you may need to meet specific requirements, such as using your debit card 12 times per month.
- Earning interest helps you maintain purchasing power by growing your cash.
- Switching for a better rate might make sense, but it’s smart to run the numbers first.
- If you decide to switch, read the fine print, and be prepared for rate changes.
- Banks and credit unions offer a variety of products that might pay more than your savings account.