Is Switching Banks Worth It?

When your savings account pays almost nothing in interest, it's smart to explore alternatives. Changing banks for a higher rate can help you grow your cash faster, but make sure you'll come out ahead before you go to the trouble of switching banks.

Why Do People Switch Banks?

Your bank or credit union is a safe place to keep idle cash, and interest earnings make your money grow. Banks lend your savings to other customers, allowing them to earn revenue off your money. In return, they pay you a portion of what they charge, which encourages you to keep your money on deposit.

However, banks differ in the interest rates they offer. Some banks, such as smaller banks, are competing for your deposit funds and are willing to offer a higher interest rate. Other banks may not need to attract customers the same way and offer less interest on your savings.

Banks also differ in the fees they charge and the account minimums they require to open or maintain a bank account. If your bank charges high fees and pays little interest, it makes sense that you'd want to switch to one that charges low fees and pays more.

The annual percentage yield (APY) tells you how much you earn on your savings, expressed as a yearly return. That number can help you compare banks; the higher the APY, the better (all other things being equal).

As of June 2022, the average APY at banks nationwide is 0.08%, but you can certainly earn more than that. Some of the best savings accounts pay 1.60% APY or more. Alternatively, if you open a certificate of deposit (CD) for at least one year, you can earn over 3% APY with some institutions. To put that in context, assume you have $5,000 in savings:

• At 0.08% APY, you earn $4 per year
• At 1.60% APY, you earn $80 per year

That's a big difference, and that's why it's important to earn a competitive rate on your savings. Online banks often have relatively high rates, and some community banks and credit unions also compete for your savings.

How To Decide if Switching Banks Is Worth It

When does it make sense to pursue a higher rate on your savings? Several factors can help you decide.

How Much Do You Have To Save?

One of the most important considerations is your account balance. If you have a substantial amount in savings, the rate matters more. For example, as with the example above, assume you can earn an extra 1.52 percentage points on your savings at a different bank. If you have $5,000 in savings, you'll get an extra $76 per year by switching, assuming rates don't change. But with $45,000 in savings, your earnings increase by $684.

Ultimately, you have to decide if chasing rates is worth your time. For $76, it might or might not be worth the effort of filling out an application, transferring money, and getting familiar with a new bank. But for $684, the higher rate becomes more appealing. Some of the other factors below can help finalize your decision.

Minimum Deposit Requirements

The size of your account balance might also determine which accounts are available to you. For example, as of June 2022, Customers Bank paid 1.00% APY on balances of $25,000 or more in the Ascent Money Market account. But you earn nothing if your balance falls below that level, so it's crucial to read the fine print and choose banks that are a good fit for your finances.

Promotional Periods

Sometimes banks advertise unusually high rates to gather new deposits, but the rate is a promotional rate that will drop after a limited time. In those cases, at least you receive advance notice that the teaser rate won't last forever. Examine the footnotes and read all bank disclosures carefully whenever you're thinking of opening an account.

Likelihood of Rate Changes

Banks change their interest rates regularly. The Balance tracks banks and credit unions with the best interest rates, and if you do the same, you'll notice that the top-ranked banks change positions frequently. If you choose a bank because it has the highest rate, you need to prepare yourself for this reality: You won't have the highest rate for long, and your rate may eventually become downright unimpressive. How willing are you to change banks if your bank stops competing for deposits?

Balance Caps and Tiered Rates

Look closely at how banks pay interest on your balance. You earn an extraordinarily high rate in some cases—but caps and tiers can limit your earnings. For example, as of June 2023, SmartyPig paid 3.85% APY on your first $10,000. After that, you earn lower rates on subsequent, larger tiers. If you have a substantial amount in savings, do the math to figure out how much you'll actually earn after taking your entire balance into account.

Should I Switch Banks To Get a Higher Rate?

Now that you know the issues, here's when it makes the most sense to go for a better interest rate:

• Your current bank pays almost nothing.
• The difference in interest earnings—in dollars, not just the APY—is worth the time and effort required to switch.
• You're comfortable opening accounts and transferring money to new banks.
• You have the time and energy to monitor rates at your bank and competing institutions.
• You're willing to change banks repeatedly if necessary.

It's important to keep in mind that even small fees can quickly eat away at any small differences in APY that you may get from banks—consider ATM fees, incoming wire fees, maintenance fees, overdraft fees, and also the cost to drive to a new, perhaps less-conveniently-located bank.

Switching Account Types Instead of Banks

If you're looking to earn more on your cash, alternative savings vehicles might pay more on your money.

If you can lock up your savings for an extended period, a CD might pay more than your savings account. Banks often pay higher rates on CDs in exchange for your commitment to leave the money untouched.

Some money market accounts pay attractive rates, too, as do rewards checking accounts, so include those options in your search. Just be sure to compare the requirements, fees, and minimums of any accounts you're considering.