When you open a savings account, the bank typically pays you for depositing your money. This is called interest, and the amount paid, or the interest rate, is a percentage of the balance. Normally, that number is positive. But savings rates have been dropping, and many banks now pay less than 1%.
Could rates dip into negative territory? Here’s an explainer on negative interest rates, what they could mean for your bank account and if we’re likely to see them in the U.S.
What are negative interest rates?
A negative interest rate occurs when the percentage of interest on an account drops below zero. A bank account balance with a positive interest rate — above 0% — grows as the bank pays interest. But with a negative interest rate, the bank could actually charge interest and decrease the balance.
Is it possible for rates to fall below zero? Technically, yes. But will banks start charging customers interest for depositing their money in savings, along with other bank fees? Probably not, says Michelle Connell, chartered financial analyst and owner of Portia Capital Management LLC, a registered Investment Advisory firm in Dallas.
“This is something we have not seen in the United States, and while it’s theoretically possible, it’s unlikely to happen,” she says.
The average savings account rate is currently 0.06% — low, but still above zero. And some institutions offer much better rates. In fact, there are savings accounts, particularly at online banks, with yields that pay more than 10 times the average.
Why interest rates change
Each day, banks that have more cash reserves than they need lend money to other banks to help those institutions meet their cash requirements. The rate the Federal Reserve sets for banks that lend out their reserves is known as the federal funds rate, or the “Fed rate."
The Fed rate is confirmed at meetings that occur about every six weeks, though emergency sessions can be scheduled due to economic conditions. The rate is often left unchanged. But it may be lowered, which generally helps stimulate the economy, or raised, often to address inflation.
Banks can change the interest rate on their own accounts with their customers at any time, and that includes the yield on deposit accounts, such as savings. But many banks tend to raise or lower yields in response to the Fed rate, since it can affect the bank’s balance sheet.
Why your rate is unlikely to go negative
The Fed rate is currently at historical lows, but it is not negative. And so far, there is no indication it will be. Federal Reserve Chair Jerome Powell stated in March 2020 that even with the global financial crisis, "We do not see negative policy rates as likely to be an appropriate policy response here in the United States."
“We do not see negative policy rates as likely to be an appropriate policy response here in the United States.”
Jerome Powell, Chair of the Federal Reserve
Central banks in Europe and Japan have experimented with negative interest rates. The theory is these rates could encourage banks to lend more money to customers, as opposed to building up large amounts of cash reserves in the central bank and paying negative interest. More loans could encourage consumers to borrow and spend more, and that could boost the local economy.
“This might seem like a great option for borrowers, but it’s not so good for savers,” Connell says. In fact, some institutions are reportedly passing the costs on to customers — charging negative interest to those with large savings deposits (above 100,000 euros, for example).
Unintended consequences of negative rates
With negative rates, people may not have an incentive to keep their money in deposit accounts. It has been reported that banks in countries with negative rates have had wealthy customers withdraw currency from accounts and request that it be physically held in bank vaults.
Cash sitting in a vault is not earning money, but it’s also not losing money with negative rates. At the same time, no one is spending that cash, which means it is not stimulating the economy.
The potential for this type of accidental consequence is a reason U.S. banks are unlikely to have negative interest rates on bank accounts, Connell says.
Fees are a larger concern
Consumers might not have to worry about negative interest rates for now, but there is another concern that is much more common — account costs.
“What you really have to worry about are abysmally low rates combined with bank fees,” Connell says.
Having a checking or savings account with the typical monthly fee of $5 or $10 is like having an account that earns negative interest, because the bank takes out money and decreases the balance. Try these tips to eliminate common costs:
If your bank account does charge fees, look for ways to waive them each month. Some banks won’t charge a fee if you keep a certain minimum balance, for example, or sign up for a qualifying direct deposit.
Keep track of your checking balance so you don’t overdraw. The average overdraft fee at large banks is $35, and many banks will charge this fee multiple times a day if there are multiple overdrawn transactions.
Avoid ATM fees. Open your account at a bank that offers large fee-free ATM networks or ATM fee refunds. For options, see this list of best banks to avoid ATM fees.
Interest rates on bank accounts are relatively low, but even so, negative rates are unlikely. It is still worth taking the time to find the best rates possible. The higher your yield, the more your money can grow, and that is good for any bank account.