Your Bank Just Dropped Your APY. Here’s What to Do Now | Banking Advice
Key Takeaways
- Banks may lower savings account interest rates alongside Federal Reserve rate cuts.
- Compare your earnings and shop around for better options if your APY has dropped.
- Be ready for future changes with routine rate checks and a shortlist of alternatives.
If you’ve noticed your savings account interest rate recently dropped, you’re not alone. Banks routinely adjust the annual percentage yield, or APY, on their savings accounts, especially after the Federal Reserve has adjusted the federal funds rate.
A lower savings account APY can cost you money in lost interest, but you don’t have to accept it. Compare high-yield savings accounts, CDs, and other options to earn the highest APY for your deposits.
Why Your APY Dropped
Banks set deposit rates based on business conditions and the federal funds rate.
The federal funds rate, set by the Federal Reserve, is the rate banks pay to borrow reserves from other banks. It also serves as a benchmark rate for consumer financial products, including savings accounts. When the federal funds rate falls, banks lower savings APYs, and you earn less from your deposits.
“Banks that have more deposits than they need to fund investments and loans can cut rates in anticipation of a Fed cut to capture the savings now,” says Gabe Krajicek, CEO of Kasasa, a bank rewards company. “It might cause some consumers to find a better deal at a competitor, but since the bank wasn’t deposit hungry, it’s less of a concern.”
How To Manage an APY Drop
If your savings account APY has decreased, first assess the damage. Apply the old APY and new APY to your current balance to compare the difference in earnings over 12 months. This can tell you how urgent it is to take action.
Next, consider moving your money. Even though most other banks may also be lowering yields, you may still be able to find a better rate than what you’re getting, whether that’s with a different institution or in a different financial product.
For example, you might move from a regular savings account to a high-yield savings account, which could help you earn more even in a declining rate environment. High-yield savings accounts are still quite liquid, making them a good place for emergency funds and money you’re putting aside for near-term goals.
If you’re comfortable with less liquidity, a certificate of deposit could help you lock in a higher rate. Laddering CDs with multiple maturity dates offers a balance of access and reinvestment risk. Treasury bills, are another option for earning higher yields when savings APYs are down.
“In a rising rate environment, you can often earn more simply by keeping your funds in a high-yield savings account, since as rates rise, the interest rate that you earn on a savings account should continue to rise,” says Gary Zimmerman, founder and CEO of MaxMyInterest. “With a CD, you’ve potentially locked in a lower rate. By contrast, when interest rates are falling, you might be better off buying a CD to lock in a higher rate.”
Of course, keep in mind that rates change frequently, and the best bank today could have a lower APY than competitors in a few months.
Before switching to a new bank, read the fine print. Some banks advertise great rates, but those rates may only apply to small balances. Others may require debit card usage or direct deposits.
Stay Ahead of Future Rate Drops
Rate drops aren’t always predictable, but you can build habits to be ready for changes. A rate drop might encourage you to make a change, but you should check APYs every few months, even when rates appear stable.
Checking on your savings rate every few months can help ensure you’re earning the most you can. Keep a list of good rate options you can turn to. If you notice a drop, you can respond quickly instead of losing interest while you figure out your plan.
Some savers use a mixed approach, keeping some savings in an accessible high-yield savings account and the rest in a CD or T-bill with a higher rate.
APYs on savings accounts change constantly, but you don’t have to settle for a lower rate if your APY drops. Making changes, such as moving to a new high-yield savings account or locking in a good rate on a CD can help you grow your money amid market changes.
“Savers should never be ‘asleep at the wallet’ and passively let their money sit in underperforming accounts,” says Mary Grace Roske, head of marketing for CD Valet. “It’s the biggest money management mistake – and the easiest one to fix.”
