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Why Online Banks Offer the Best High Interest Savings Rates, and How to Choose the Right One

A photo to accompany a story about online savings accounts Lorenzo Antonucci/Getty Images
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Savings account interest rates are on the rise. But on a national scale, they’re still extremely low: the most recent data shows the national average savings rate is just 0.08%.

But these types of yields are largely found among traditional savings accounts with large, national banks. By contrast, high yield savings accounts with online banks can look much different these days. Many of the online savings accounts on our list of best savings accounts have rates now topping over 1% APY.

There are a few reasons for the big disparity between traditional savings accounts and high yield accounts from online banks — and many of those reasons include factors you should consider when choosing a new savings account.

Here’s what to know about online savings accounts, how to find an account with a high interest rate, and more differences between online and traditional savings. 

Online Banks vs. Physical Banks

Traditional banks, especially large, nationwide financial institutions generally have several brick-and-mortar locations, while online banks may have no physical locations at all. Some allow ATM access with partner ATMs, while others operate solely via online account or mobile app. 

A big difference between the two is the interest rate you can score on your savings. Online banks often have high yield savings account options without any monthly maintenance fees or minimum deposit requirements. Physical banks are more likely to offer traditional savings accounts, which offer the same security for your cash but with much lower yields.

“The most generous of [online banks] pay as much as 1% to 2% more than typical bank accounts, a difference that can quickly mount up if you have a large sum,” says financial expert Steve Wilson, who is also the founder of banking and credit union information site called BankDash

The average savings account currently pays out only 0.08% interest on balances, according to data from the Federal Deposit Insurance Corporation (FDIC). Meanwhile, many of the best online savings account rates are currently over 1%, with some even topping 1.25% APY.

Online banks are great for scoring high yields with easy access to your cash without being subject to monthly fees or minimums. But remember, if you enjoy the convenience of visiting a bank branch or even depositing checks or cash in person, and online-only bank may not be right for you. 

Some high yield savings accounts are offered by online divisions of larger financial institutions, like Capital One or Citi, so a hybrid account with a bank like these could be a better option. 

Why Digital Savings Accounts Offer Higher Rates

Online banks can pay higher interest rates on deposits “since they lack considerable infrastructure and administration costs,” Wilson says. 

Each bank branch a traditional bank opens requires costs that online-only banks simply don’t have — from building maintenance to leasing costs to employees. As a result, online banks don’t have to spend nearly as much to run their operations and can pass on those savings to customers in the form of higher interest rates.

“Before the pandemic, some online banks were paying 2% to 3% in interest,” Delyanne Barros, money expert and founder of Delyanne the Money Coach recently told NextAdvisor. “It’s hard to say if we’ll see those numbers again this year, but it’s possible they may return eventually if the Fed continues to raise interest rates and inflation isn’t tempered.” 

That said, you shouldn’t just go with the first online bank you come across. After all, various digital banks and financial institutions are competing with one another, so they may have better rates than others or special promotions that change over time. They also have different levels of service, capabilities when it comes to mobile banking or ATM access, and other account options you may want to consider. 

Before you open any new account, make sure the account details and terms align with your financial goals.

Are Online Bank Accounts Safe and Trustworthy?

Savings accounts aren’t subject to market fluctuations like investment accounts. As a result, they don’t earn as high of a potential return, but they are much safer than higher-earning accounts in the stock market. 

And online banks that are insured by the Federal Deposit Insurance Corporation (FDIC) provide the same level of protection as traditional banks do. With FDIC insurance, each customer’s account — up to $250,000 per account type — is covered in case of bank failure. 

As you’re comparing online banks, Wilson recommends using the FDIC’s BankFind tool to verify any bank you’re considering is FDIC-insured. For reference, each of the banks with accounts on our list of best high yield savings accounts is FDIC-insured.

In the meantime, you can also check the credibility of online banks by researching them with the Better Business Bureau (BBB) and reading reviews on websites like Trustpilot and Consumer Affairs

Pro Tip

If you’re considering a high yield savings account with a credit union, look for National Credit Union Administration (NCUA) insurance instead. This agency’s insurance works similalry to the FDIC, but protects credit union customers’ account balances.

Choosing the Right Online Savings Account

Interest rates are on the rise this year, meaning you’ll see a similar rise in the savings account rates offered by online banks, says Julian Morris of Concierge Wealth Management, a financial advisor in Boston. If your goal is to take advantage of higher interest rates over the next several months, look for accounts that are already increasing rates and will be likely to continue rate hikes to keep up with the competition.

But rates aren’t the only factor to consider. Other details that make for a great online savings account include no monthly fees, low account minimums and easy accessibility for withdrawals and transfers. 

That’s especially true if you’re looking for a savings account to keep your emergency fund: “You don’t want to be in an account that limits your withdrawals, should you need capital in the event of an emergency,” Morris says.

It can also help to look for a bank that has a robust mobile app or online interface that is easy to use. Finally, remember to check whether any online bank you’re considering is insured by the FDIC, so you know your funds will be protected from any potential for bank failure. 

How to Open an Online Savings Account

One major advantage of online savings accounts is how easy they are to open. 

Once you decide to open an account with an online bank, prepare to submit information like your name, your address, your phone number and your Social Security number in your online application. 

You may also need to include the routing and account numbers from an existing bank account on your application. That will be the account from which you can transfer your opening deposit to your new online savings account.

Each online savings account and online bank may have different requirements, though. Make sure you read the account terms and full application details before you submit your information online.

Once you share the information to open your account and transfer money to fund it, you should be set with your online savings account. From there, you can set up direct deposit for automatic, regular transfers, or manually transfer money so your account balance can grow over time.