Interest rates on high-yield savings accounts are high and could rise more. The Federal Reserve has been raising rates to fight inflation, and banks have raised annual percentage yields too. The Fed’s latest quarter-point rate hike on July 26 is beginning to filter through to interest rates across consumer savings accounts. If you’re thinking about opening a high-yield savings account, consider choosing one with a federally insured issuer from our list below.
What is a high-yield savings account?
A high-yield savings account, often called an HYSA, is a type of deposit account offered by a bank or credit union. An HYSA functions similarly to a traditional savings account, except you can earn much more interest. In some cases, you can get an annual percentage yield (APY) that is 10 times higher than the national average savings account rate.
High-yield savings accounts typically have no minimum opening balance or monthly fees, though some banks may require you to maintain a certain minimum balance to earn interest or avoid a monthly service charge.
Depending on the financial institution, you may earn the same rate regardless of your balance, or your APY may be tiered based on your balance.
What is APY?
A high-yield savings account’s rate measures the simple interest — or interest earned on the principal you deposit in the account. APY is the rate of return earned on your savings account, including compound interest. Compound interest is the interest you earn on the money you deposit and the interest you earn on that money. Most savings accounts and CDs compound daily or monthly. The more often interest compounds, the faster your money will grow.
While HYSAs have some of the highest APYs available, those rates are variable. That means your bank or credit union can change your APY — your rate may be great when you first open the account and then gradually decrease. Generally, APYs increase when the economy is doing well, and the Federal Reserve raises its benchmark rate. Conversely, rates can drop when the economy weakens, and the Fed lowers rates.
Pros of high-yield savings accounts
High savings account rates: You’ll generally earn more interest than you would with a traditional savings account.
Compounding interest: Interest compounds, helping you grow your savings.
Accessibility: These accounts are a great place to stash your emergency fund, as your money remains accessible. Some accounts, like certificates of deposit (CDs), offer high rates but impose penalties if you withdraw money earlier than planned when you open the account. Some accounts even offer ATM cards for easier access.
No or minimal fees: Fees with high-yield savings accounts are rare, so you won’t need to worry about costs eating into your balance.
Low-risk: High-yield savings accounts are insured by the Federal Deposit Insurance Corp. or National Credit Union Administration, making them a very low-risk option for your money. HYSAs have FDIC insurance — NCUA insurance for credit unions — that provides government-backed insurance on bank accounts up to $250,000, which protects your savings if your bank or credit union encounters financial trouble.
Cons of high-yield savings accounts
Variable rates: Your savings account’s APY can increase or decrease over time. While individual banks set rates, they’re loosely tied to the Federal Reserve’s official interest rates. Banks may opt to decrease savings rates when the fed funds rate goes down.
Minimum balance requirement: Some accounts may have a high minimum opening deposit.
Tiered APYs: Some banks may have tiered APYs depending on the deposit amount. For instance, you may earn a higher rate if you deposit $5,000 vs. $100. So while a $5,000 deposit isn’t necessarily required, it could result in a better APY.
Better for short-term savings: High-yield savings accounts aren’t the best choice for long-term savings goals, like retirement. Investment accounts tend to offer higher long-term returns.
Withdrawal limits may apply: Depending on your bank, you may have a limit on monthly withdrawals.
Tips on finding the best high-yield savings account
Look at which bank accounts offer the best savings account interest rates. High savings account rates will earn you more interest, though the high-yield savings account with the best available APY might not necessarily be the right option for your finances. Considering other factors besides APY can help you find an account that best meets your needs.
Research applicable deposit requirements. Is there a minimum initial deposit requirement? Do any other deposit requirements apply? Are there tiered APYs depending on your deposit amount?
Some accounts may have monthly maintenance fees or other fees. Look into which fees may apply before opening a new account.
Understand how you can access your money before opening a new account. For example, can you log into an online dashboard? Does your bank have a mobile app? Is it connected to an ATM network?
Review available deposit options. Are mobile deposits an option? Can you make deposits via an ATM?
Look into whether you can link your new account to an existing account at another bank. If this is important to you, you’ll want to be sure there are no restrictions or waiting periods for accessing your money.
How to open a high-yield savings account
Once you’ve determined the best high-yield savings account rates — don’t forget to make sure you’re only looking at accounts from member FDIC or NCUA institutions — and found a high-yield savings account that works for you, opening one is simple and can be done in person or online. You’ll generally need to provide your personal information, proof of identity, and address to open a new account. Make sure you have your driver’s license, Social Security card or Individual Tax Identification Number, and copies of a recent mortgage statement or utility bill.
Depending on the account, a minimum deposit amount could apply when you open your HYSA account. If that’s the case, you’ll also need to be ready to transfer money from an existing account to meet the deposit requirement.