Money & Finance

What low interest rates mean for your checking account

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Have you ever heard of the federal funds rate? No? You’re not alone. While you may not be familiar with what the federal funds rate is or what it means, I guarantee you’re familiar with the ways it impacts your personal finances. One of the many things that the federal funds rate does is to serve as a benchmark for interest rates. The federal funds rate has now been at a record low of 0% – 0.25% since March 15th, 2020. While low interest rates can be beneficial for things like borrowing money, it also means that your bank is probably not offering you much interest on your checking and savings accounts.

Why do interest rates change?

The Federal Reserve primarily raises and lowers the federal funds rate in an effort to promote healthy levels of economic growth and control inflation. Over the last decade, the federal funds rate has fluctuated between 0% and 2.5%. Today, the Federal Funds rate is effectively zero. So while this is a historic time, it is not unprecedented and certainly not a reason to panic. There are, however, some things you can do to help keep your money accessible without losing out on too much interest while the rates are low.

low interest rates in the context of federal funds rate changes 2010-2020

The differences between checking & savings accounts

Checking Accounts

A checking account is set up for your normal, everyday use. These accounts provide little to no interest, but they offer a high level of flexibility in the number and types of transactions we’re able to make in a given time period. ATM withdrawals, automatic bill pay, debit card purchases, recurring payments, and money transfers are the most common.

Savings Accounts

Savings accounts, on the other hand, are set up for just that – saving. They generally impose limitations on the number of transactions you can make to incentivize you to keep your money put. Savings accounts typically offer better interest rates than checking accounts. 

Many of us don’t often think about withdrawing money from our savings accounts. We keep the money we need for our day-to-day spending in our checking account and the money we don’t need often in our savings account. Because of that, you may have forgotten about the law that caps monthly withdrawals and transfers from your savings account at 6. 

Fortunately, to help ease the burden of COVID-19, the Federal Reserve lifted that regulation on April 24, 2020. As of that date, consumers will (for the time being) be allowed to make unlimited transactions with their savings account.

What does this temporary regulation waiver mean for you?

Option 1: Consider moving your funds into a high yield savings account 

It means that you have the option to move more of your money into a savings account, without limiting your access to it. Because the Federal Reserve is temporarily lifting the restrictions on transactions in and out of your savings accounts, you now have the opportunity to gain more interest than you would by leaving your funds in a traditional checking account.

Not all savings accounts are created equal

Your best bet to accrue the most interest is to consider a high yield savings account. While high yield savings accounts still won’t offer as high of rates as they used to pre-COVID 19, they are still likely to beat the rate you’re getting with your traditional checking account. The average checking account currently has an interest rate of 0.05%. Yes, you read that right: five-hundredths of a percent. 

High yield savings accounts like those offered by American Express and Citibank are all currently at or above 1.0%*. As always, make sure you read the fine print to see what fees may be assessed for any particular account or if that bank requires a minimum deposit. American Express and Citibank currently* offer a $1 (or less) minimum balance to open the account and zero maintenance fees.

By moving some of your funds from a traditional checking account to a high yield savings account, you’ll be able to accrue roughly 20 times more interest. Electronic fund transfers (available with most checking accounts) make moving your money fast and easy. Better yet, your hard-earned dollars will be just as accessible to you now that the monthly transaction cap will be lifted.

Option 2: consider buying a no-penalty certificate of deposit

A certificate of deposit, or CD, provides a premium interest rate for customers who deposit a lump sum into an account and leave it untouched for a pre-determined amount of time. Compared to many other types of investments, CDs offer fixed, safe, and federally insured rates for your money to grow. Typically, the longer the term of your CD, the higher the interest rate will be. However, rates fluctuate quite a bit between banks, so it’s essential to shop around.

Not all CDs are created equal

No-penalty CDs can provide an extra layer of flexibility while also giving you an opportunity to yield more interest than your traditional checking account. A no-penalty CD differs from a traditional CD in that you won’t be assessed fees for making an early withdrawal. If liquidity is a necessity for you right now, these no-penalty CD’s may have slightly less attractive interest rates than a traditional CD, but will still earn you more interest than your traditional checking account. Currently, some of the best no-penalty CD’s are offered by CIT Bank and Ally Bank, which are advertising interest rates of up to 0.9%*. 

Comparing high yield savings accounts with no-penalty CDs 

There isn’t a blanket right or wrong choice between a no-penalty CD and a high yield savings account. There are, however, some distinct differences that may help you decide between the two: 


Convenience may be a factor for you if the bank you already utilize offers either a no-penalty CD or high yield savings account. However, don’t let that limit your options prematurely. Rates differ dramatically between banks. So doing your homework and going after the best rate will be worth your time.

Minimum Deposit Required

The most obvious difference you’ll notice between a CD and a high yield savings account is the deposit amount required for opening. At CIT Bank and Ally Bank the no-penalty CD’s that I referenced above require a starting minimum deposit of $1000* or more. Most high yield savings accounts, like those offered by American Express and Citibank require a $1 or less deposit to open an account.

Fixed Rate vs. Variable Rate

A less obvious, but important difference between CDs and high yield savings accounts is that CDs typically offer fixed interest rates. High yield savings accounts rates are variable. That means that if you purchased a no-penalty CD, you’ll be locking in that interest rate for the duration of the CD. Even if the bank were to lower their rates after you purchased your CD, you would retain the higher interest rate that you originally purchased your CD at. 

In contrast, high yield savings accounts rates are variable. So the rate that you open an account with is not guaranteed to stay that way. If that bank chooses to lower their rate, that’s the rate you’ll get. However, if your bank chooses to raise their rate, your rate will also increase.

The bottom line

High yield savings accounts and no-penalty CD’s are great options to accrue up to 20 times more interest than your current checking account is providing. They’re federally insured and will keep your money accessible to you in these uncertain times. Best of all, they’ll ensure your money keeps working for you even when interest rates are low.  

*interest rates and account details as of 9/17/2020 

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