If you have more than one savings account, you’ve probably noticed that some pay different interest rates. If you have three or four, you’ve undoubtedly seen this difference. Interest rates differ across financial institutions and among different accounts held within the same institution. Many factors come into play when determining interest rates, including the account type and its holding length. But what determines interest rates? It’s more complicated than you might think. This article will help you understand why some accounts have different interest rates than others.
- Rate Differences May Reflect Different Risk Levels
If a bank perceives that a customer is more likely to pull money out and use it for something else, it might charge that customer a higher interest rate to cover its losses if you do. A high interest savings account attracts people who want high returns on their deposits but don’t plan on using their money for a while.
- Inflation Affects Interest Rates
Inflation is a measure of how much prices rise over time. When inflation rises, so do interest rates, making it more expensive for banks to borrow money and thus affecting interest rates on savings accounts.
- The Availability of Credit Influences the Interest Rate
Banks need to make sure that people can pay back their debts, so they rely on factors like income and employment history to determine whether or not you’re a risky loan for them. Getting a reasonable interest rate may be harder if you have poor credit.
- The Federal Reserve Influences Interest Rates
The Federal Reserve Bank affects interest rates by increasing or decreasing bank reserves. According to the experts at SoFi, increasing reserves decreases interest rates because more funds are available to borrow. On the other hand, decreasing reserves increases interest rates because fewer funds are available to borrow.
- Taxation of Banks Can Influence Interest Rates
If a bank is tax at a higher rate, it will try to recoup those taxes at higher interest rates. Similarly, if it is taxed at a lower rate, it will offer lower interest rates. This is because banks want to maximize their profits, and offering high-interest rates makes them more money than providing low ones.
- Short Term Deposits Have Lower Interest Rates Than Long Term Ones
When you create a savings account at your financial institution . You will be required to choose the amount of time you want for your money to remain inaccessible. If it stays there for a longer period of time, it will accumulate greater interest. This is due to the fact that financial institutions are more ready to provide greater interest rates on accounts that they are able to keep undisturbed for longer periods of time.
- Credit Unions Are Often More Willing to Pay Higher Rates Than Banks
Because they are not require to deliver a return on equity to shareholders, credit unions are often in a position to provide more competitive interest rates than for-profit financial institutions. On the other hand, financial institutions like banks are obligate to make a profit for their shareholders. Banks are able to do this because their interest rates are lower than those offered by credit unions. Therefore, if you desire greater interest rates on the deposits you make into your savings account, it is in your best interest to opt for a credit union rather than a bank!
There is no one fixed rate that applies to the interest earned on savings accounts. Even while you could start out with a certain interest rate, your financial institution, whether it a bank or credit union, has the ability to change that rate at any moment.