What to do if your bank drops your APY
You open your bank statement and discover that the bank lowered your annual percentage yield (APY). High-yield savings accounts (HYSAs) generally offer attractive rates, but it’s easy to forget that many options have variable rates. That means rates can go both up and down. Understandably, you don’t want to lose interest earnings, so you decide to search for better-paying options. Continue reading to understand why APYs drop on savings accounts, how to determine whether you should stay with your current bank, and what to compare when analyzing other institutions.
What does a variable rate mean for a savings account?
A variable rate savings account is one where the APY can change over time. Most savings accounts and HYSAs have a variable APY, so they don’t stay at a constant rate. Unlike a certificate of deposit (CD), which locks in a rate for a specified period, most savings accounts don’t.
That means your interest rate or APY isn’t guaranteed. Rates can increase when conditions are favorable but decline when conditions change.
If you’re wondering how APY differs from the interest rate, the interest rate is the percentage a financial institution pays on your balance, while APY reflects the interest rate and the effect of compounding. APY is a better tool for comparing savings accounts.
Ask yourself two questions if your savings APY dropped:
- What is the new APY on my savings account?
- Will the new rate still allow me to accomplish my goals for the money?
There is little uniformity in why or how often banks reduce APYs on savings accounts. Review your bank’s Truth in Savings disclosures to understand how it handles rate changes and other account terms.
Why banks lower savings APYs
There isn’t just one reason a bank may reduce its savings account APY. Understanding the different factors can help you make more informed decisions when rate shopping.
Market rate changes
The Federal Reserve plays a role in savings account rates. According to the Federal Reserve, its monetary policy can affect short-term rates and the broader financial landscape. Its monetary policy can affect short-term rates and the broader financial landscape.
Fed decisions aren’t the only reason a bank may lower your APY, but they are a key factor. “The Federal Reserve doesn’t necessarily set your savings account APY directly, but it can set the tone. When the Fed changes the federal funds rate, most short-term rates move in a similar direction, and banks usually adjust what they pay on deposits. The specific APY your bank offers is typically a decision made by that bank and not the Fed,” says Michael Rodriguez, CFP®, founder and financial planner at Equanimity Wealth.
Banks set their own rates, so two different institutions may react differently to Fed actions.
Promotional APY changes
Banks may offer promotional APYs to attract new customers or deposits. Promotions vary between banks, and there’s no guarantee an institution will maintain an introductory APY after the promotional period ends.
It’s smart to be alert when you see an especially high APY while searching for a new bank. It could be a promotional rate, which isn’t inherently bad, but it’s helpful to know before opening an account.
Balance tiers or account requirements
Some banks pay a specific APY if you meet a balance requirement. Some institutions may also require specific actions to receive a higher rate.
If you fall below the balance threshold or fail to meet a requirement, your rate may decrease. This isn’t a widespread rate cut, but it does affect your overall APY.
What to check first after your APY drops
Leaving your bank is a logical reaction after your APY drops. Before you move your money, it’s essential to review four things after a rate drop:
- Confirm the new APY and effective date.
- Determine whether it applies to your entire balance.
- Calculate the real impact of the rate decrease using a savings calculator.
- Review account disclosures to better understand fees and other account requirements.
“Do not look at how much the APY went down. Look at the difference it leaves behind. Your new APY matters compared to the best rate you can find and to inflation. So do the math in dollars, not in percentages. Take the difference between your rate and the top rate available, then multiply by your balance. If your bank drops you to 3.5% while others pay 4.5%, that one point on a $20,000 emergency fund is $200 a year. Two hundred dollars is worth fifteen minutes. Twenty dollars is not,” says Achim von Bodman, CFP®, senior tax manager at Watter CPA.
Ultimately, you want to determine whether the account still fits your needs.
Should you stay, compare, or switch savings accounts?
Reacting to a rate drop without comparing your options can work against your financial goals. Deciding to leave should depend on how competitive the new rate is and how switching could affect your goals.
When staying may make sense
No one likes seeing their high-yield savings account APY decline, but if it’s a small change, staying may make sense.
“I usually tell clients to look at both the size of the drop and how far away their new rate is from the best available alternative. A simple rule of thumb would be: if your APY drops by less than a quarter of a percentage point and you’re still within roughly half a point of the top high-yield savings rate, it’s not usually worth rushing to get a new account,” adds Rodriguez.
If the account has minimal fees and meaningful features, staying can be prudent if the rate drop is negligible.
When comparing makes sense
Comparison makes sense when you find better-paying options. It may also be worthwhile if the account has features you don’t like, such as fees or restrictive requirements.
Comparing doesn’t commit you to switching banks, but it helps you determine whether your current account is competitive.
When switching may make sense
Switching banks may make sense when it could earn you materially more interest. If the new bank has lower fees, convenient access, or useful tools while providing appropriate deposit insurance coverage, you may want to consider switching.
That’s not to say rate hopping is wise, as frequent switching can mean dealing with transfer delays, promotional-rate restrictions, or new account requirements. Review the best high-yield savings accounts to find an option that works for you.
How to compare new savings accounts after a rate cut
Not all savings accounts are equal, and if you decide to move after a rate reduction, you want to carefully evaluate your options. Use these five factors to compare new savings account options:
- Don’t just compare interest rates, as APY reflects compound interest. Compare APYs instead.
- Review monthly fees, minimum deposit and balance requirements, and whether the rate is a teaser rate.
- Understand how you’ll access your cash, mobile app capabilities, customer support, and how long it will take to transfer money by automated clearing house (ACH) to your main checking account.
- Determine whether the rate is variable.
- Confirm that the bank is Federal Deposit Insurance Corporation (FDIC)-insured by using the FDIC BankFind Suite; if you’re selecting a credit union, confirm it’s National Credit Union Administration (NCUA)-insured.
Von Bodman advises against moving funds without doing your homework. “Just do not move it in a rush. Frustration makes people go after the number they see, which is often a short-term offer that resets in three months or an account with limits and hard transfers. Take a night to think,” adds Von Bodman.
Finding the highest-paying APY is reasonable, but it may not be the best fit. A better option may be an account with useful features, low fees, and a compelling rate, with deposits that stay within applicable insurance limits.
How to keep future APY changes from catching you off guard
A simple game plan can help you spot APY changes more quickly. Include the following items in an APY monitoring checklist:
- Review all statements, emails, and notifications for account and rate updates, although keep in mind that not every APY decrease requires advance notice.
- Create a recurring reminder to compare APYs; monthly or quarterly reminders are often sufficient.
- Identify when promotional APYs end and begin comparing rates before they end.
- Have a list of alternatives you could consider, so you’re not moving banks too frequently to capture minor rate differences.
- Prioritize liquidity and access for emergency savings even if the rate isn’t the top one in the market.
You can’t control bank rates, but you can make sure your savings account remains a good fit for your needs.
Why did my APY go down? Bottom line
It’s fair to expect that rates can drop with variable APYs. The inverse is also true, and APYs can increase over time. Understanding why your rate dropped is helpful, but so is identifying how the decrease will affect you financially. Staying at the same bank may make sense in some instances, but if the difference in earnings is meaningful, moving accounts may make sense, especially if it improves access and helps reduce fees.
Frequently asked questions
Yes, with a variable rate, an institution can change your APY according to the terms of the account agreement and disclosure rules.
No, variable APYs aren’t necessarily bad, since rates can both decrease and increase. If the rate stays strong and fees are low, the account may still be worthwhile.
No, not automatically. It’s best to run the math to determine the dollar difference and consider fees and access to your money. If the difference is significant, you may want to move.
Yes, an APY change doesn’t affect deposit insurance coverage. If the institution is already FDIC- or NCUA-insured, eligible deposits are still insured.
