How Savings Account Interest Works
Your savings account pays interest, but how it is calculated and credited affects what you actually earn. A short guide to balances, rates and compounding.
How it is calculated
Many savings accounts calculate interest on the daily closing balance. Each day, the balance is multiplied by the daily equivalent of the annual rate, and those daily amounts add up over the period. This means money sitting in the account earns from the day it arrives, and large balances late in the month do not retroactively boost earlier days.
When it is credited
Although interest is calculated daily, it is usually credited to the account periodically — often quarterly. Once credited, that interest becomes part of the balance and itself starts earning interest. The more frequently interest is credited, the more compounding works in your favour, though at typical savings rates the difference is small.
Comparing accounts
When comparing savings accounts, look beyond the headline rate:
- Rate tiers — some accounts pay a higher rate only above a threshold balance.
- Minimum balance rules and the penalty for falling below them.
- Crediting frequency — monthly compounding beats annual, all else equal.
- Fees for transactions, statements or debit cards that could offset interest earned.
- Applicable tax on interest income, per the rules where you live.
For money you will not touch for a fixed period, a term deposit may offer a higher rate than a savings account, at the cost of easy access.
Important Points
- Interest is often calculated on the daily closing balance.
- It is typically credited quarterly, after which it compounds.
- More frequent crediting means more compounding.
- Compare minimum-balance rules, tiers, fees and tax, not just the rate.
