When Do Banks Pay Interest on Savings?
Learn the ins and outs of how and when banks pay interest on your savings, empowering you to better manage your money.
When you deposit money into a savings account, banks pay you a reward for the use of your funds. This reward is known as interest. Understanding how and when interest is paid allows your money to grow over time, making your savings work harder for you.
Understanding Interest Calculation
Banks calculate interest on savings accounts using the principal balance, which is the amount of money held in the account. The rate at which interest is earned is expressed as an Annual Percentage Yield (APY) or an interest rate. While the interest rate is the base percentage applied, the APY provides a more complete picture because it accounts for compounding. Compounding occurs when earned interest is added to the principal balance, and then future interest is calculated on this new, larger amount, allowing you to earn “interest on interest.”
Interest is calculated daily, even if it is not paid out every day. This daily calculation means that each day, a small amount of interest accrues based on your account balance for that specific day. This accrued interest then contributes to the overall amount you receive at the end of the payment period. The more frequently interest compounds, the faster your savings can grow.
Common Interest Payment Schedules
Banks credit interest to savings accounts on various schedules. The most common frequencies are monthly, quarterly, and annually. For instance, if a bank pays interest monthly, the accrued interest from the previous month is added to your account balance at the end of each month.
Quarterly payments mean interest is credited every three months, at the end of March, June, September, and December. Annual payments occur once a year. Although interest is calculated daily, it is formally added to your account balance only on these specific payment dates. Banks may choose different schedules based on their operational practices.
How Account Activity Affects Interest
The amount of interest you earn is directly influenced by changes to your account balance through deposits and withdrawals. Since interest is calculated daily based on your principal, any change in your balance affects the base on which that day’s interest is calculated. For example, if you make a large withdrawal mid-month, the interest calculated for the remaining days of that period will be based on a lower daily balance.
Conversely, making additional deposits increases your principal, leading to more interest earned from the day the funds are added. Some accounts feature balance tiers, meaning different interest rates apply based on the amount of money held. Maintaining a higher balance in such accounts can qualify you for a better interest rate.