Blogging by Art B.

Interest rates are at an all-time low in the United States. This includes savings account interest rates, mortgage rates, rates for certificates of deposit and even money market rates. Knowing this, the question you may be asking is: “How do banks set those interest rates for their customers?”

Interest Rates and Fees Create Profit

Banks use their various interest rates and fees to make a profit. They do this by loaning money out at a higher rate than they pay account holders. A mortgage from Bank X may cost 5% interest, while a savings account from the same bank pays only 0.25%. Of course this is a simplified example. Banks use many different equations and factors to decide what to charge on loans and what to pay account holders for the use of their money.

Overdraft fees, new fees for using the ATM machine and fees for even maintaining a checking account can raise revenues for the bank. These fees and the difference between various interest rates allow the bank to pay the salaries of their employees, keep the lights on and all the other various overhead requirements of staying in business.

Federal Reserve

The rate set by the Federal Reserve is an indication of how much money the Reserve is putting into the economy and is usually lower during a recession. Different banks may offer different interest rates is that they balance the prime interest rate with their own interests: how much money they need to receive, their overhead costs and shareholder expectations.