You may have noticed that the money you’ve set aside in a savings account isn’t earning much interest.

Banks often pay low interest rates on savings accounts. In February 2020, the average annual percentage yield, or APY, for U.S. savings accounts was just 0.09%.

One reason savings account rates are so low is that financial institutions profit when the rate on the money they lend out is higher than the rate they pay people who deposit money into savings.

When rates on loans are low, banks like to keep savings account rates even lower to continue making money on them.

Another reason some banks may not need to offer higher interest rates is that they’ve already won a large share of customers and aren’t competing aggressively with other banks for new business, according to research by Itmar Drechsler, a professor of finance at the University of Pennsylvania.

We’ll review places to look for higher interest rates as well as alternatives to savings accounts.

Where can I find a higher rate on a savings account?

Although interest rates on savings accounts are often low, you can find higher rates if you shop around. Online banks are a good place to start.

Look for an online savings account, such as Credit Karma Savings, that’s a high-yield savings account. These bank accounts could have interest rates above the national average. Over time, that can get you greater dividends for your money.

Take this example, where you deposit $500 for a year.

Type of savings account Interest rate Balance after one year (compounded monthly)

High-yield savings account

1.8%

$509.07

Traditional savings account

0.09%

$500.45

For security and peace of mind, make sure your savings account is protected at an institution that’s FDIC insured.

How are interest rates set on savings accounts?

Although financial institutions set their own interest rates, the Federal Reserve can influence rates by buying and selling financial products like bonds. This affects the federal funds rate, which is the rate banks charge other banks on overnight loans. The federal funds rate trickles down to affect other interest rates, including your savings account rates and the rates you pay on auto loans, credit cards and mortgages.

As of October 2019, the federal funds rate was 1.83%. Compare that to November 2000, when it was 6.51%.

Alternatives to savings accounts

You may be able to earn higher returns if you open different types of accounts to grow your savings. Here are some alternatives to savings accounts.

CDs

A certificate of deposit, or CD, is a type of bank account that holds your deposit for a set term, which could be six months, a year or longer. CDs pay either fixed or variable interest, and you receive the interest plus the amount you deposited when the CD’s term is up. The downside is you may pay a penalty for early withdrawal.

Interest rates on CDs are usually higher than on conventional savings accounts.

You can choose to open one CD and wait until it matures to access all your funds at once, or you can open several CDs with different terms using a CD ladder strategy and access your money at regular intervals as the individual CDs mature.

Money market accounts

A money market account is another type of deposit account at a bank or credit union. You may need to make a minimum deposit to open a money market account. You can make withdrawals or, like a checking account, payments from your account — but typically not more than six times a month.

The interest rate on money market accounts is usually higher than on conventional savings accounts.

Keep in mind that money market funds, or money market mutual accounts, are not the same as money market deposit accounts. Money market funds are investments that are not insured by the FDIC.

Mutual funds and ETFs

Investors form a mutual fund by combining their money and using it to buy investments like stocks and bonds. You can buy shares in a mutual fund to own a portion of the fund’s investments. You’re able to cash out of a mutual fund for a fee whenever you choose, and you receive the value of the assets you hold in the fund.

An exchange traded fund, or ETF, is similar to a mutual fund because you can buy shares in the fund and it invests in stock, bonds and other securities. But if you sell your shares in an ETF, you’ll receive the market value that those shares currently sell for rather than the value of the fund’s assets that corresponds to your shares.

Buying shares in a mutual fund or ETF can potentially result in a higher return than putting money in a savings account. But these investments are not guaranteed by the FDIC, so their value could go down. You could lose some or all of the money you invest.

What’s next?

Before choosing a savings account, research your options and think about your financial goals. Here are some questions to ask yourself.

• What APY does the account have?
• Is there a minimum deposit?
• Are there any fees for opening or withdrawing funds?
• Do I need access to a physical bank branch?
• What level of risk am I willing to take?

For Credit Karma Savings: Banking services provided by MVB Bank, Inc., Member FDIC.

Calculate your savings

Use our savings calculator to find out how much you may be able to grow your savings and how long it could take.

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