What Is the Average Interest Rate for Savings Accounts?

Average savings account interest rates at brick-and-mortar banks is historically low as of late-2021 – but shopping around can help you find higher rates.

By Frances Coppola | American Express Credit Intel Freelance Contributor

4 Min Read | February 1, 2022 in Money

 

At-A-Glance

Savings account interest rates are tied to economic conditions and the U.S. central bank’s policy decisions.

After moving up and down through a comparatively wide range historically, average savings account interest rates have settled close to zero since the 2008 recession and appear likely to remain there.

It’s still possible to find higher rates, usually at online banks. 

Every week, the Federal Deposit Insurance Corporation (FDIC) reports the national average interest rates on savings accounts and certificates of deposit (CDs). That’s the average of the interest rates paid by traditional brick-and-mortar banks.

 

With some careful shopping around, though, you can find accounts that offer higher rates of interest. But to compare interest rates across different types of accounts and financial institutions, you need to know some basics about interest rates, including these common terms:

  • Annual percentage rate (APR): The annual interest rate on an account.
  • Annual percentage yield (APY): The full return you can expect on the account every year if interest is compounded. Compounding can make the APY higher than the APR.
  • Compound interest: Earning interest on interest. In other words, it’s all the interest you earn on your original deposit plus all previously earned interest.

 

Average Savings Account Interest Rates

On December 20, 2021, the FDIC reported that the national average interest rate on bank savings accounts was 0.06% APY, regardless of the size of the deposit. If you’re able to tie your money up for a period of time, you can get better interest rates: On that same day the average interest rate on a five-year CD was 0.28% APY1 – nearly 5 times higher.  Because these rates are averages, you might not find a savings account or CD with exactly that rate. But it gives an idea of the sort of rates you can expect from brick-and-mortar banks.

 

What Determines Average Interest Rates?

Interest rates on bank savings accounts and CDs depend in part on the U.S. Federal Reserve’s interest rate decisions. When the federal funds rate – the key policy interest rate set by the Fed – rises, interest rates on bank savings accounts usually rise as well. Similarly, when the federal funds rate falls, so do the interest rates on bank savings accounts. Sometimes savings interest rates change in advance of Fed rate decisions, if the Fed is signaling they may move rates in a particular direction. If you want to anticipate the likely future direction of interest rate changes on your bank saving accounts, it’s worth keeping an eye on Fed announcements.

 

For example, in the early 1980s, the federal funds rate soared and interest rates soon followed, with the average rate on a five-year CD peaking at nearly 12% in 1984.2,3 Since then, the Fed’s policy rate has gradually fallen, and so too have interest rates on savings. In the 1990s, average rates were around 4–5%, and after the early 2000s recession they fell to 1–2%. After the 2008 financial crisis, the Fed cut the federal funds rate to 0.25%, and average interest rates on bank savings fell to nearly zero.

 

In mid-2020, the Fed cut the federal funds rate to zero and said it intends to keep it there through at least 2023.4 Very low interest rates on bank savings may be the norm for the foreseeable future.

 

Why Should You Have a Savings Account?

Even with interest rates expected to remain low for some time to come, there are several reasons why regularly putting money into a savings account is still worthwhile:

 

  • You might want to build up some “rainy day” savings to help you weather sudden drops in your household income.
  • You can save up for big purchases such as a new car, home furnishings, or a dream vacation.
  • You can put aside money in an emergency fund to cover unexpected expenses such as household repairs or medical bills.

 

Can You Find Higher Interest Rates?

If these low APYs don’t meet your needs, it might be worth considering a high-yield savings account. Many online banks have savings accounts with significantly higher yields than those available at brick-and-mortar banks.

 

However, high-yield accounts aren’t immune to Fed interest rate changes. In August 2020, interest rates on online savings accounts were typically around 1% APY, but following the Fed’s announcement that its policy rate would remain at zero through 2023, online banks trimmed their interest rates. By January 2022, online banks were typically offering interest rates of around 0.5% APY on high yield savings accounts.

 

Just as with traditional bank savings accounts, it’s worth shopping around for high yield savings accounts that pay more than average. As little as 0.05% over the typical APY can make a difference to your earned interest over time.

 

The Takeaway

Average interest rates on bank savings accounts and CDs are close to zero and seem likely to stay there for some time to come. Savings accounts at online banks can be a good option for digital-savvy savers, since they typically offer higher interest rates than traditional banks. But whether you choose to save in traditional banks or higher-yielding online savings accounts, it’s worth shopping around to see whether you can find an interest rate that beats the average.

Frances Coppola

Frances Coppola spent 17 years in the financial services industry before becoming a noted writer and speaker on banking, finance, and economics. Her work appears in the Financial Times, Forbes, and a range of other publications.

 

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

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