Pros and Cons of Savings Accounts - Experian (2024)

In this article:

  • Pros of Savings Accounts
  • Cons of Savings Accounts
  • How to Choose a Savings Account
  • Alternatives to Savings Accounts

Whether you're saving for emergencies or for financial goals such as a new home or big vacation, a savings account offers a safe, reliable place to stash your cash. But there are both upsides and downsides to savings accounts. Here's a closer look at the pros and cons of placing your money in a savings account to help you make the best choice for your financial needs.

Pros of Savings Accounts

Opening a savings account offers many benefits, including:

Easy Access to Funds

Some savings vehicles, like certificates of deposit (CDs), impose a penalty if you remove money before the account matures, but you can typically take money out of a savings account at any time. Many banks offer both savings and checking accounts and let you link the two. This makes it easy to automate savings deposits and move money into your checking account when you need to use your savings.

Ability to Earn Interest

Money in a savings account earns interest, helping your savings grow faster than if it were in your checking account. While annual percentage yields (APYs) on traditional savings accounts aren't very high, high-yield savings accounts often have much higher APYs—in some cases, up to 10 times higher.

Federally Insured

Choose an account with a bank insured by the Federal Deposit Insurance Corp. (FDIC) or a credit union insured by the National Credit Union Association (NCUA) and your savings is guaranteed up to $250,000 per account type, per account holder. Even if the bank fails, your savings are protected.

Require Little or No Money to Open

Unlike some savings and investment vehicles, many savings accounts can be funded with no initial deposit. Many online-only banks have no minimum deposit requirements; brick-and-mortar banks are more likely to request a deposit, but it's often as low as $25.

Earn Money Faster

Find High-Yield Savings Accounts

Cons of Savings Accounts

There are also a few potential downsides to savings accounts.

Interest Rates Can Vary

Interest rates for both traditional and high-yield savings accounts can vary along with the federal funds rate, the benchmark interest rate set by the Federal Reserve. If the federal funds rate drops, your APY may drop, too, affecting how fast your savings grow.

May Have Minimum Balance Requirements

You might need to keep a certain minimum balance in your bank account to avoid paying account maintenance fees. Some types of savings accounts base your APY on your account balance. If your budget makes it hard to meet minimum balance requirements, you could face fees that will eat into your savings.

May Charge Fees

Not all banks charge fees, but many do. If you're not careful, bank fees can eat into your savings, potentially canceling out any interest you earn. Savings accounts may charge fees for overdrafts on your account, wire transfers, using out-of-network ATMs or making more than a certain number of withdrawals per month. There may also be inactivity fees if you go a certain number of months without making any deposits or withdrawals.

Interest Is Taxable

You'll have to pay income tax on any interest your savings earn. The good news: There's no tax on your savings account balance—just on the interest. For example, having $3,000 in a high-yield savings account earning a 4% APY would mean paying taxes on $120 in interest.

How to Choose a Savings Account

To choose the best type of savings account, follow these steps:

  1. Consider what features are most important to you. For example, if you'd prefer a fixed APY and don't mind giving up access to your money for a while, you may want to open a CD. If you're starting an emergency fund, perhaps you'd prefer a high-yield savings account that offers high APYs and convenient withdrawals. You can also open more than one savings account, using each for a different purpose.
  2. Compare what different banks and credit unions offer. Be sure to take fees, minimum balance requirements, restrictions on withdrawals, ATM networks, FDIC or NCUA insurance and the bank's online and mobile apps into account.
  3. Complete an application and open your account. You can usually do this online or in person; check the bank's website for details and to see what documentation you'll need. At a minimum, most banks require some form of government-issued photo identification and your Social Security number. Make any initial deposit required.

Alternatives to Savings Accounts

A traditional or high-yield savings account isn't the only place to put your savings. Depending on your goals, you may want to consider the following options.

  • Certificates of deposit (CDs) are interest-earning deposit accounts at banks and credit unions. Interest on CDs is usually fixed and typically higher than APYs of traditional savings accounts. However, you must leave the money in the CD for a set period, usually three months to five years. Because CDs generally charge penalties for withdrawing funds before the term ends, they're usually best for long-term savings goals such as a home down payment.
  • Money market accounts combine elements of a checking and savings account and typically earn higher APYs than traditional savings accounts. You can write checks on a money market account, which is convenient if you need the money fast in an emergency, and may be able to make debit transactions.
  • Emergency savings accounts (ESAs) are sometimes offered as an employee benefit. These plans deposit after-tax money from your paycheck into an emergency fund, which can make saving simple. ESAs earn interest, and some employers even make matching contributions. If your ESA is linked to a retirement plan, withdrawals before age 59 ½ may incur taxes and penalties on account earnings.
  • Cash management accounts, available from non-bank financial institutions such as brokerages, mingle features of checking accounts, savings accounts and brokerage accounts in one. These accounts usually boast higher interest rates than standard savings accounts, are typically FDIC-insured through partner banks and allow you to write checks and pay bills online.

The Bottom Line

Saving money regularly is a positive financial habit that can help you reach life goals and reduce your reliance on credit cards. To put your savings growth on the fast track, set up automatic transfers from your checking account. Some employers will also deposit part of your paycheck directly into your savings.

Maintaining good credit is another healthy financial habit. Make it a practice to check your credit report and credit score at least once a year so you can spot potential problems and take action if needed.

Pros and Cons of Savings Accounts - Experian (2024)

FAQs

Pros and Cons of Savings Accounts - Experian? ›

Savings account benefits include safety for your savings, interest earnings and easy access to your money. However, savings accounts may have drawbacks, such as variable interest rates, minimum balance requirements and fees.

What are the pros and cons of saving accounts? ›

Savings Account: Pros & Cons
ProsCons
High interest earnings will grow your money exponentially over time.Limited to certain types and amounts of withdrawals and transfers.
You can withdraw at any time during your bank's business hours.May require a minimum balance to avoid paying fees.
2 more rows

Does applying for a savings account affect credit score? ›

Monitoring and improving your credit score is important. So it's a valid concern to question whether opening a savings account affects your credit score. The short answer is no; it doesn't. Opening a savings account will not harm nor help your credit score.

Does applying for a high yield savings account hurt your credit? ›

Although opening a high-yield savings account can offer many benefits, it won't help you build a credit history. That's because bank account activity typically isn't reported to credit bureaus and doesn't affect your credit score.

What are some pros and cons of a checking account? ›

The primary benefit of checking accounts is the ability to store money you intend on spending, either through debit card transactions, checks, or cash withdrawals. However, the downside is they typically don't pay interest.

What are the pros and cons of saving and investment? ›

Saving typically results in you earning a lower return but with virtually no risk. In contrast, investing allows you the opportunity to earn a higher return, but you take on the risk of loss in order to do so.

What are 2 pros of saving? ›

5 Benefits of Saving Money
  • It helps in emergencies. Emergencies are always unexpected. ...
  • Cushions against sudden job loss. You may have a good job now, but what if you were to lose that job? ...
  • Helps finance those big-ticket items and major life events. ...
  • Limits debt. ...
  • Helps prepare for retirement.

What are the risks of a savings account? ›

The interest rate on savings generally is lower compared with investments. While safe, savings are not risk-free: the risk is that the low interest rate you receive will not keep pace with inflation. For example, with inflation, a candy bar that costs a dollar today could cost two dollars ten years from now.

What are the benefits of a savings account? ›

It allows individuals to deposit and store their money while earning a certain rate of interest on the deposited amount. The primary objective of a savings account is to encourage individuals to save money over some time, providing them with a safe and accessible place to keep their funds.

Is Experian safe to use? ›

Experian uses bank-level encryption and a trusted third-party service to link your bank accounts. The links power the Experian Boost and Personal Finances tools, and they're generally safe and secure.

Is Experian credit score accurate? ›

Credit scores from the three main bureaus (Experian, Equifax, and TransUnion) are considered accurate. The accuracy of the scores depends on the accuracy of the information provided to them by lenders and creditors.

Why is my Experian score so much higher than TransUnion? ›

Credit scoring models can weigh certain information in your reports more heavily than other credit score factors. For example, one scoring model may put more emphasis on total credit usage than others. Because there are varied scoring models, you'll likely have different scores from different providers.

Is there a downside to a high-yield savings account? ›

The cons of high-yield savings accounts

Interest rates on high-yield savings accounts are variable and can fluctuate at any time, so while a bank may advertise a high annual percentage yield (APY) when you apply, it likely won't last forever.

Is there a catch with high-yield savings accounts? ›

What are the cons of a high-yield savings account? Variable rates. Interest rates on these accounts can and do fluctuate, which means the APY you started with could potentially drop. Keep your eye on such changes and remember that the money is yours; at any time, you can move it to a bank that offers a higher rate.

Does opening up a savings account hurt credit? ›

Opening a savings account does not impact your credit score because you aren't borrowing money and the activity in your savings account isn't reported to a credit agency. Most financial institutions will run a soft credit inquiry when you open a savings account but it is only to check your identity.

What are the advantages and disadvantages of savings rates? ›

In India, Savings Accounts offer a reliable avenue for accruing interest on your deposits. While the interest rates may not compete with high-yield investments like bonds, Savings Accounts provide a steady, risk-free return.

What is the disadvantage of basic saving account? ›

The cons of a Savings Account typically involve lower interest rates than other investment options, potentially eroding purchasing power due to inflation. There may be maintenance charges, and you must maintain a minimum balance.

References

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Jonah Leffler

Last Updated:

Views: 5275

Rating: 4.4 / 5 (65 voted)

Reviews: 88% of readers found this page helpful

Author information

Name: Jonah Leffler

Birthday: 1997-10-27

Address: 8987 Kieth Ports, Luettgenland, CT 54657-9808

Phone: +2611128251586

Job: Mining Supervisor

Hobby: Worldbuilding, Electronics, Amateur radio, Skiing, Cycling, Jogging, Taxidermy

Introduction: My name is Jonah Leffler, I am a determined, faithful, outstanding, inexpensive, cheerful, determined, smiling person who loves writing and wants to share my knowledge and understanding with you.