Interest Rates Are on the Rise. Why Aren't Savings Rates?

Banks just aren't that into new customers right now.

There was a time when rising interest rates had a silver lining. As the rate for products like auto loans and home mortgages crept up, so did the APY banks paid on savings accounts. Today, people who are accustomed to looking for that silver lining wonder why savings rates remain so low. As of this writing, the average rate on a 30-year fixed-rate mortgage is 6.40%, while the national average APY on savings accounts is a measly 0.24%.

The answer boils down to one thing.

Swimming in cash

When a bank, credit union, or any other financial institution offers an attractive interest rate, it's designed to bring in new customers. With those customers come new deposits. For the past two years, banks have not needed new deposits.

In the early stages of the COVID-19 crisis, banks feared huge losses. In response, they built up large cushions of cash reserves. By early 2021, when it was clear those losses had not materialized, they moved to shrink their reserves. Suddenly, money they had earmarked as emergency funds flooded back into bank coffers.

In short, banks were in the position of having too much cash on hand. Flush, they have not needed new customers or new deposits. While the situation will surely change at some point, it does not appear that we're there yet.

Until banks once again need to attract new customers, the interest rate you'll earn on your savings account is unlikely to increase by much.

The online option

When it comes to getting the best bang for your buck, it pays to check out online banks. Because online banks don't have the same overhead costs as traditional banks (like maintaining physical locations), they are better positioned to pay higher interest rates on deposit accounts and to charge lower interest rates on loans. Here are a few of the advantages of online banks:

• Many online banks pay 1% to 2% more than traditional banks on savings accounts.
• Online banks typically charge low or no maintenance fees and carry no minimum deposit requirement.
• Some online banks offer instant access to your cash through partner ATMs.
• The FDIC insures online banks the same way it insures traditional brick-and-mortar banks. That's to say, each account category is covered for up to $250,000 per depositor, per insured bank.

Online banks aren't the right fit for everyone. Still, there's no rule saying you must keep all of your accounts under one roof. For example, you're free to have a checking account through a traditional bank and a savings account with an online bank. If you link the two accounts, you can easily transfer money back and forth as needed.

Some banks stand out

Although the average national APY on savings accounts is only 0.24%, some banks have managed to find a way to offer an attractive APY. They may be the minority, but these banks are worth checking out if you're looking to earn more on cash stashed away for a rainy day.

Research shows that by the time we go to bed at night, we've made an average of 35,000 decisions, both large and small. Fortunately, when it comes to deciding where you'll earn the best rate on your savings account, the decision is practically made for you.