Interest Rates
An interest rate is the cost that you pay in order to borrow money. When you have a home mortgage, a credit card balance, or a paycheck loan you are paying interest for the ability to spend money at this time instead of waiting and saving until you have enough cash to pay for something. When you put money in a savings account, money market account, CD (certificate or deposit) or some checking accounts, you are being paid interest. For this blog we will further discuss savings interest rates.
When you open a savings account at the bank you will learn the interest rate for that savings account. Some rates are fixed for a specified amount of time for example some banks offer high introductory interest rates as an incentive to open an account with them. CDs also typically have fixed rates that will remain constant for the terms of the CD. Other savings options have interest rates that are variable in which the interest rate goes up or down in relation to the prime interest rate. Traditional savings accounts and money market accounts have variable interest rates.
Interest rates are paid based on a percentage of the deposit. The more money you deposit or have in your account the more money you will make due to the interest. The higher the interest rate the more money you will make. With some accounts the higher your minimum balance the higher the interest rate the bank is willing to pay you.
Interest rates are compounded at variable times some accounts compound interest daily while others are weekly, monthly, or annually. Most interest rate payments are immediately reinvested into the account however some accounts will allow the interest payment to be sent separately to the account owner. Because of the compounded interest every time interest is paid the account grows which means that the next time interest is added to the account the amount will be a little larger.
Savings interest rates are determined based on the prime interest rate set by the Federal Reserve Board. When interest rates are high in order to borrow money savings interest rates are high as well so that banks will have the funds to pay the loans. When the prime interest rate is low the savings rates are low as well.