If Interest Rates Are Rising, Why Isn’t My Bank Account Earning More Interest?

With all the talk of rising interest rates, it’s natural for consumers to assume that the rates on their bank accounts are headed up too.

To fight record inflation, the Federal Reserve (the Fed) has raised the federal funds target rate — a key borrowing rate — four times this year, to a current 2.25% to 2.5% and is expected to do so again in the Fall. This comes after years of the near zero or zero rate levels.

Higher rates result in consumers paying more for mortgages, credit cards, auto loans, home equity lines of credit, and other loans. The Fed rates also affect how much interest is earned on savings accounts, certificates of deposit (CDs), and other accounts. Thus, the silver lining to rising rates would seem to be that the interest on your bank accounts would finally rise above near zero levels.

Unfortunately, that’s not always what happens.

While some banks and financial institutions have raised interest rates on savings, many have not. One reason is simply that it takes longer for some banks to respond to rising interest rates than others. Another issue is that, due to high levels of pandemic saving, many institutions aren’t looking to woo new customers (and more deposits) with attractive interest rates.

Here’s a closer look at why your bank account may not be earning the interest you think it should.

How Fed Rates Affect Banks

When you hear that the Fed has raised (or lowered) interest rates, it is referring to the federal funds rate, which is the target interest rate at which banks borrow and lend money to one another. This has a ripple effect across the entire economy.

When interest rates rise, loans become more expensive for banks and, in turn, consumers and businesses. However, it can also mean higher yields for savers. That’s because, when you have a savings account at a bank, you are effectively letting the bank borrow your money, and the institution pays you interest in return.

In a higher-rate environment, banks may start raising the annual percentage yield (APY) on savings accounts and rewards checking accounts to attract new customers. However, that’s not always how it works, at least not right away.

Recommended: What Is a Good Interest Rate for a Savings Account?

How Banking Lending and Borrowing Works

When you — and all bank customers — make a deposit to your checking or savings account, your bank uses that money to make higher interest loans, such as personal loans, car loans, and mortgages. That’s a chief way banks make money.

With people saving more during the pandemic, banks have seen their deposits skyrocket. The result, at least for the short term, is that many institutions don’t need to attract checking and savings customers with competitive interest rates because they already have plenty of cash on hand to use for lending.

Also, when banks pay interest on customers’ savings accounts in a low-rate environment, which has been the case for many years, they may pay more than what they make when they lend to other banks. The result is that some banks have to slash profits to keep paying interest to savers or even go into the red. Now that rates are rising, some of these institutions are holding back on increasing APYs to help make up for those lost profits.

Some Banks Lag Behind the Fed Longer than Others

It may be that your bank will raise rates on your savings or checking account soon. They just haven’t done it in sync with the Fed’s announcements.

Typically, online savings accounts respond more quickly to Fed rate changes. This is because there is generally a lot more competition among online banks for customers (and their deposits). APYs offered by traditional brick-and-mortar banks often react much more slowly to Fed rate increases, and yields hardly ever rise as high as the Fed’s interest rate.

What’s important to remember is that banks don’t increase rates at the same time or at the same rate as the Fed. It’s a good idea to keep an eye on both your savings and your credit accounts to see what moves your bank is making.

A Note About Brick-and-Mortar Banks

Big banks with lots of physical locations generally have higher operating expenses than online banks and, as a result, may be reluctant to offer higher rates that cut into profits.

But that’s only part of the story, says Brian Walsh, senior manager of financial planning at SoFi. Big banks know their customers often experience inertia when it comes to changing banks. “They may have started their account in college or when they were setting up direct deposit at their first job. Those customers tend to just stick around,” he explains. As a result, big banks may determine they won’t lose customers if they don’t raise rates, so they are less likely to do so.

Recommended: Traditional Banking vs. Online Banking: What’s Better for You?

Customers Often Overestimate How Difficult it is to Change Banks

Often banking customers are reluctant to switch because they overestimate the amount of time or paperwork it will take,” says Walsh. They may feel a slightly higher interest rate just isn’t worth the trouble. According to SoFi research from February 2021, a third of 1,600 respondents said they see no benefit to switching their bank or financial institution.

Walsh acknowledges that there is some time involved in changing banks, but notes that the hour or two you spend will likely pay off over time. “The difference between close to zero percent interest on your savings account and 1.80% can add up to a lot of money,” he says.

Recommended: How to Earn More Interest On Your Money

The Takeaway

Even if the Fed is raising rates, banks and other financial institutions don’t necessarily follow, at least not immediately. They may decide it doesn’t fit into their business and profit strategies to raise rates on customer accounts. They may also be counting on the fact that banking customers often experience inertia when it comes to switching to a higher paying bank, especially if they have been using an established institution for a long period of time.

Understanding why your bank account interest rates don’t move in tandem with the Fed’s actions can help determine if you should make a change. If you’re not satisfied with the interest you’re currently earning on your accounts, you may want to consider an online bank account like SoFi’s all-in-one Checking and Savings account. When you open an account with direct deposit, you can earn a competitive APY. Plus, you won’t pay any account fees.

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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