Like many things during the pandemic, high-yield savings accounts have taken a hit in recent months. A few years ago (think early to mid-2019), you could secure an interest rate of over 2% on these accounts. Now? Averages are just 0.5%.
Fortunately, "what goes around comes around," as they say, and the lower rates won’t last forever.
What will it take for those APYs to come back up? And should you still consider a high-yield savings account in the meantime? Here’s what you need to know.
Will high yield savings rates go back up?
Higher interest rates are most certainly in the future but experts aren’t optimistic they will come anytime soon.
"We may see small gains in high-yield savings account yields in 2022," Ken Tumin, founder of DepositAccounts.com, said. "Widespread gains are unlikely until at least 2024. Any gains will require a strong and steady economic recovery."
At a recent speech, Federal Reserve Chairman Jerome Powell confirmed as much himself.
"When the time comes to raise interest rates, we will certainly do that," Powell said. "That time, by the way, is no time soon."
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How does the Federal Reserve affect interest rates?
Interest rates on high-yield savings accounts are variable, meaning they change over time. And the Federal Reserve — more specifically, the benchmark interest rate it sets — plays a key role in those changes.
"When the Fed pushes rates lower, it reduces the interest on borrowing in general," Tumin said. "When banks earn less interest on the loans they make, it means they can afford to pay out less to their depositors in the form of interest."
That’s what happened in 2020 when the Fed reduced its benchmark rate to almost zero in an effort to counteract the economic downturn caused by the coronavirus pandemic. This also lowered mortgage rates, mortgage refinance rates, rates on student loans as well as other loan rates to help consumers put more money back into the economy. Today's low rates are even encouraging consumers to open up a credit card, personal loan and more.
Banks responded by cutting their interest rates gradually but significantly. According to Tumin, the average online savings account rate fell from 1.71% in March — when major COVID-19 lockdowns started happening — to 0.51% today.
Aside from the Fed, other government economic stimulus measures — like added unemployment bonuses, stimulus checks and Paycheck Protection Program loans — also played a role in the decline of savings rates, putting more cash in bank coffers and de-incentivizing any bumps in APYs.
"Another factor that can put downward pressure on high-yield savings account rates is the volume of deposits banks currently have," said Ben McLaughlin, head of SaveBetter. "When banks have already sufficient deposits — as it has been since the onset of the pandemic — the banks simply don’t need to incentivize additional deposits by offering attractive rates."
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Should I open a high yield savings account now?
The average APY on a high-yield savings account is right around 0.5%. While that’s a far cry from the 2%-plus seen a few years ago, it’s nothing to scoff at — especially compared to traditional savings accounts.
"Even though high-yield savings account rates are relatively low today, they still have a substantial rate advantage over brick-and-mortar bank savings accounts," Tumin said.
It’s true: The average savings rate on a traditional bank is a mere 0.05%. If you were to put $10,000 in a bank account today, at that rate, you’d have $10,050.11 by year’s end. At a 0.5% rate, you'd have $10,511.41 — almost $500 more.
"High-yield savings accounts can be a great place to keep the money for short-term goals, like saving for a vacation, wedding, or home renovation," McLaughlin said. "It is safe, protected by the government, and easy to access at any time."
There are other perks too, he said — things like low (or no fees), easy withdrawals and no minimum balances, "so the threshold to start saving with one is low."
To be clear: Interest rates still vary, even on high-yield savings accounts, so it’s important to shop around before opening one. Credible can help you find a high-yield savings bank account provider and interest rates to help you bank savings. Check out what options — from each banks' minimum balance requirement to its APY — are currently available.
4 factors to consider when opening a high-yield savings account
The interest rate is just one of the many factors you should think about when opening a high-yield savings account. You'll also want to consider the following:
- If there are any bank fees (monthly fees)
- If there are any limits on withdrawals
- If there's a minimum balance requirement
- If there's responsive customer service
Reading ratings and reviews is important. Before you consider opening a high-yield savings account, make sure you do your research so you can meet your savings goals even quicker.
Are you ready to start saving? Consider expanding beyond traditional savings and open up a high-yield savings account. Use Credible to compare high-yield savings account options from across the country. (Note: There isn't a credit score minimum required).
If you have more questions about high yield savings, opening an online savings account — or how to just reach your savings goals in general, Credible's financial experts can help. Reach out to learn more.