The face-off Higher interest rates have made it more expensive to carry a balance on your credit card or take out a car loan, but on the flip side, there’s an opportunity to earn more interest on cash savings. You can do this by opening a high-yield savings account or buying a certificate of deposit .
A high-yield savings account is a bank account that pays better interest than a traditional savings account. Savers can now get annual percentage yields above 5% on some high-yield accounts, according to DepositAccounts.com. Online-only banks often offer the best rates on this type of account because they don’t have the expense of maintaining physical branches, said Ken Tumin, senior industry analyst at LendingTree and founder of DepositAccounts.com.
Why it matters “Not too long ago, it didn’t really matter what you did with your cash and now all of the sudden it’s extremely important,” said Grant Meyer, a certified financial planner and founder of GTS Financial in Bloomington, Minn. Indeed, the Fed signaled Wednesday that it could be done lifting rates for the time being. The Dow Jones Industrial Average DJIA , Nasdaq Composite Index COMP and S&P 500 SPX were all down slightly on Thursday morning after the Fed’s decision.
But be aware that the term “high-yield savings account” has no formal definition. Banks can slap that label on any account. It’s up to you to check the rate that a bank is offering and compare it against other banks and credit unions . There’s one quirk to be aware of at the moment with CDs. Traditionally, CDs with the longest terms have the best rates. But at the moment shorter-term CDs are offering higher rates than longer term ones, a phenomenon known as an “inverted yield curve.” This can signal a pending recession, which is relevant here because the Fed would likely lower rates in the event of a recession. That’s another reason you may want to act fast to take advantage of higher rates.