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

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

What are the advantages and disadvantages of saving money? ›

Pros and Cons of Saving

Saving has many benefits such as providing a financial safety net for unexpected events, liquidity for purchases and other short-term goals, and being safe from loss. However, there are also some drawbacks to consider, such as missing out on potential higher returns from riskier investments.

Is it safe to connect your bank account to Experian? ›

The links power the Experian Boost and Personal Finances tools, and they're generally safe and secure. However, there's always a risk with sharing information, and you can unlink accounts at any time and request Experian to delete your personal data.

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.

What are the cons of savings accounts? ›

Among the disadvantages of savings accounts: Interest rates are variable, not fixed. Inflation might erode the value of your savings. Some financial institutions require a minimum balance to earn the highest interest rate.

What are two pros and two cons of a savings account? ›

Three advantages of savings accounts are the potential to earn interest, it's easy to open and access, and FDIC insurance and security. Three disadvantages of savings accounts are minimum balance requirements, lower interest rates than other accounts/investments, and federal limits on saving withdrawal.

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.

What are 3 benefits advantages of saving your money at a bank? ›

Saving at a bank helps you manage your finances in a more organized and planned manner. Having a savings account lets you separate funds used for daily needs from savings funds. You can also check your savings funds' incoming and outgoing flows through neatly recorded transaction history or account mutations.

Can Experian see all my bank accounts? ›

Loan and credit card accounts will show up, but savings or checking account balances, investments or records of purchase transactions will not.

Can Experian be trusted? ›

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.

What are the disadvantages of Experian? ›

The main disadvantage of Experian is that, unlike FICO, it is rarely used as a stand-alone tool to make credit decisions. Even lenders that review credit reports in detail rather than go off a borrower's numerical score often look at results from all three bureaus, not just Experian.

Why is my Experian score so much higher? ›

When the scores are significantly different across bureaus, it is likely the underlying data in the credit bureaus is different and thus driving that observed score difference.

How do I build up my credit score fast? ›

15 steps to improve your credit scores
  1. Dispute items on your credit report. ...
  2. Make all payments on time. ...
  3. Avoid unnecessary credit inquiries. ...
  4. Apply for a new credit card. ...
  5. Increase your credit card limit. ...
  6. Pay down your credit card balances. ...
  7. Consolidate credit card debt with a term loan. ...
  8. Become an authorized user.
Jan 18, 2024

What is a good Experian credit score? ›

For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750. In 2022, the average FICO® Score in the U.S. reached 714.

What are the pros and cons of online savings accounts? ›

Despite the rising virtual presence of traditional banks, online-only competitors still offer some clear advantages for consumers.
  • Better Rates, Lower Fees.
  • Better Online Experiences.
  • No Personal Relationships.
  • Less Flexibility With Transactions.
  • The Absence of Their Own ATMs.
  • More Limited Services.

What are the pros and cons of saving vs investing? ›

Key Takeaways

Saving offers low risk and quick access to funds, while investing provides the potential for higher returns and wealth growth. Determining the right approach requires evaluation of your personal financial situation, goals, and comfort with saving and investing.

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