What is a variable APY? Why it’s important to check your yield

An annual percentage yield (APY) is the percentage rate indicating how much interest a bank account earns over the course of one year. It differs from a base interest rate in that it takes into account the effect of compounding.

As it pertains to your bank account, there are generally two types of APYs: fixed and variable. Here’s what you need to know.

Variable vs. fixed APYs

A fixed APY — which is typically found in certificates of deposit (CDs) — is a yield that remains constant over a specified period of time. Unless you’ve chosen a CD that will let you “bump-up” your rate during the term, that means you’ll be unable to change the APY after you open an account.

In contrast, a variable APY — which is typically found in savings, money market accounts and even some checking accounts — is a yield that can fluctuate over time. A change in your APY is usually in response to macroeconomic conditions, including increases or decreases to the federal funds rate by the Federal Reserve. 

APYs, both fixed and variable, skyrocketed in recent years as the Federal Reserve increased interest rates to combat inflation. But now, with inflation closer to the Fed’s target goal, the central bank has begun reducing rates again, which has the indirect effect of reducing APYs. 

As such, variable accounts are seeing decreases in their APYs. 

Why it’s important to periodically check your APY

Banks with variable APY accounts usually reserve the right to change the yield at any time, though they are required to give you 30 days’ notice before a yield reduction goes into effect. 

With recent changes to the federal funds rate, it behooves savers to check their yield every so often, as banks start to pull back their yields in response to the Fed’s movements. 

Moreover, during this time, various banks have been accused of bait-and-switching consumers, enticing savers with high-yielding accounts, and then severely dropping those yields in favor of new accounts that effectively take their place. 

Most recently under scrutiny was Capital One. The digital bank was sued by the Consumer Financial Protection Bureau (CFPB), stating that Capital One cheated millions of customers out of more than $2 billion in interest payments. The CFPB alleged that the bank “misled consumers about its 360 Savings accounts and obscured its higher-interest savings product from them,” according to a CFPB news release. The higher-interest savings product was a new account launched by Capital One, and it was virtually identical to their previous product just with higher interest offered. Thus, it’s never been more important to confirm periodically that you’re still getting the yield you want. 

“Just as we monitor checking and credit card accounts to make sure nothing is amiss, it is also prudent to check on variable rate savings accounts,” said Mark Hamrick, Senior Economic Analyst at Bankrate. “While banks are required to provide notice when making an adjustment, that disclosure might be easy to miss, or slip our minds during busy times. Having that level of awareness [of variable yields] is similar to making sure that we’re locking our front door at night — only in this case, it is to optimize our finances.”

What to do if your bank drops your APY

Put simply: shop around.

Unfortunately, a variable APY means the yield you earn today may not be the yield you earn tomorrow. But shopping around can insulate you from these changes by moving to a bank that offers a more competitive yield. 

In general, online-only banks, including Bask Bank and LendingClub, tend to offer the most robust rates, though there are exceptions to that rule. 

Many large brick-and-mortar banks, including Chase Bank and Bank of America, usually offer paltry interest rates on their deposit products. So, if the criterion for choosing an account is the yield, it’s usually best to steer away from these accounts. 

But when exactly is it the right time to switch your account? Well, it’s not always necessary or prudent to change banks every time your APY drops. As banks often react to the same macroeconomic conditions when setting their APYs, a yield drop at one bank can quickly be followed by drops at others. 

If your original yield fell, but is still on par with other high-yielding accounts on the market — give or take 0.50 to 0.75 percentage points in your APY — it may not be beneficial to switch accounts. This is especially true as deposit accounts enter into a state of flux, decreasing in response to Fed rate cuts.

Beyond the yield, Hamrick says you should perform a cost-benefit analysis when considering switching accounts. For example, you may consider whether leaving your current bank may risk losing some benefits associated with loyalty rewards and personalized service, including whether you’d lose access to brick-and-mortar locations (if that’s important to you). Consider also whether you’d stand to benefit by switching to a new bank, including a better digital experience or lower fees.

Lastly, to insulate yourself from future rate drops, you may consider opening a CD, an account with a fixed yield. At the right rate, a CD with a term of one year or greater will guarantee that you continue to earn a high rate, even as your savings account yield drops, and you may even be able to outpace inflation.  Shorter-term CDs can also be a good option, though, especially if you’re interested in setting up a CD ladder. Just keep in mind that withdrawing money from a CD before the specific term is complete, will likely result in an early withdrawal penalty.

Bottom line

Banks can change the interest rate on variable APY accounts at any time, including savings, checking and money market accounts. To ensure you’re still getting the yield you want, it’s important to periodically check your APY, especially if it is a declining rate environment on deposit products. And if your bank drops your APY, don’t fret; you can always shop around.