Why Are Interest Rates on Savings Accounts So Low?

Ward Spangenberg | April 13, 2022

Interest rates on savings accounts are so low because so many people have put so much money into their savings accounts that banks want to encourage more spending.

Why Are Interest Rates So Low?

You may have read that it’s a good idea to put your money in a savings account, so you can earn interest on the money in that account. That’s still a good idea, but you may also have noticed that the interest rate on your savings account is really low, and the money you have in that account isn’t growing very much.

It’s not just you, banks typically pay low interest rates on savings accounts. Since the start of the COVID-19 pandemic, those interest rates have crept even lower. In February 2020, average annual percentage yield (APY) for savings accounts in American banks was only 0.09%. In October 2021, that had dropped to 0.06%. That means a savings account with $10,000 in it, at an APY of 0.06%, will earn just $6.

Banks Don’t Want Your Money

The banks do this for their own self-interest. Any financial institution profits when the rate on the money they lend out is higher than the rate they offer people who deposit their money into a savings account. As rates on loans are low, it’s in the bank’s interest to keep the rates on savings accounts even lower in order to keep making money on them. A high interest rate on a savings account helps account owners, but not the banks themselves.

Furthermore, larger banks aren’t always incentivized to offer good deals to their customers because they’re not in competition with other banks for that business. As Vox puts it, “banks don’t want your money.” They would rather you be out spending your money.

Following the Federal Reserve

In March 2020, partly in response to the economic crisis caused by the COVID-19 pandemic, the Federal Reserve cut its interest rate to almost zero. Banks base their savings account rates on the benchmark set by the Federal Reserve. So, when the Reserve slashed its rates down to nothing, banks followed suit.

If the banks earn less on their loans to borrowers, they have to save money somehow. They do this by paying less interest to people who save their money in their accounts.

While the Federal Reserve cut its interest rates, it also used its quantitative easing program to release $120 billion into the economy. This gives banks all the capital they need and less reason to give consumers attractive savings options.

A Terrible Time for Savers

According to Vox, this is a feature of the system, not a problem. Low interest rates and high capital are designed to make consumers buy, not save money. This puts money out into the economy, which benefits the banks. Money sitting in a savings account benefits the consumer.

Additionally, with people not spending as much during the COVID-19 pandemic, banks have been overwhelmed with deposits (up to $2 trillion). While this is good for individuals, it’s an issue for the banks because they have much less incentive to offer high-yield savings to incentivize people to do business with them.

For people who don’t have a lot of money to spend and who are looking to save what money they have, this is more of a problem than a feature. Even doing the right thing, like putting a quarter of your paycheck into a savings account, seems pointless because despite what you may have been told about doing this, your money will not grow. This is why The New York Times says it is “a terrible time for savers.”

What Are Your Options?

So, What alternatives do you have?

Current offers a high-yield savings product called Current Interest that allows members to earn 4.00% APY on up to a total of $6,000; that’s 60x the national average. There is no spending requirement or any fees to use the product and it takes less than 2 minutes to sign up.

Other types of accounts offer potentially higher returns, but they come with their own drawbacks and caveats. A certificate of deposit, for example, is a bank account that keeps your deposit for a fixed length of time (six months, a year, or even longer). CDs pay interest that is either variable or fixed. When the fixed length of time expires, you receive the interest and the amount you deposited.

However, if you want to pull your money out early — say, to cover an emergency — you might have to pay a penalty. But if you want to grow your money, a certificate of deposit usually has a higher interest rate than a standard savings account.

You can also try a money market account, where you are limited to withdrawing your money to only six times a month. These accounts have higher interest rates than standard savings accounts, but they are not insured by the FDIC.