What's a high-yield savings account and how does it work?

Editor's Note: APYs listed in this article are up-to-date as of the time of publication but may fluctuate as the Fed rate changes. CNBC will update as changes are made public.

A high-yield savings account (HYSA) is a savings account that earns an above-average interest rate, while giving you the same access to your funds as a traditional savings account.

Most HYSAs are offered by online banks, fintechs or credit unions, but some brick-and-mortar banks have gotten into the game, too. These accounts offer a lot of incentives for savers, but there are some tradeoffs. Here's all you need to know about high-yield savings accounts.

A high-yield savings account rewards you with a higher interest rate than a traditional savings account, allowing your money to grow faster. The interest rate that these accounts offer is known as the annual percentage yield (APY). The higher your APY, the faster your money grows.

In any savings account, your APY can go up or down at any time in accordance with the Federal Reserve changing its benchmark interest rate.

Like traditional savings accounts, HYSAs typically allow you to access cash when you need it, sometimes with a free ATM card. And like a traditional account, your HYSA is federally insured by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for up to $250,000.

Savings accounts typically enjoy compound interest, which means you earn a return on both the principal balance and the interest the principal earns. Some accounts compound daily, others monthly. The more frequently your interest compounds, the greater your return.

Because online banks don't have the overhead of brick-and-mortar buildings, they can offer a higher APY. But it may come with deposit and balance minimums, monthly fees or other limitations.

We made our top picks for HYSAs based on yields, availability, fee structure and ease of use.

If you want to maximize your return, the Western Alliance Bank High-Yield Savings Account offers a high APY. It only requires a $1 minimum deposit to open and there are no monthly fees or overdraft charges.

The EverBank Performance Savings also offers a high APY and comes with no monthly fees or minimum balance requirements to earn the rate.

Unlike many brick-and-mortar savings accounts, the American Express® High Yield Savings Account offers an APY that rivals the return you'd get from an online bank — with no monthly fees or minimum balance requirements.

Most banks use ChexSystems, a bank reporting agency, to help determine your eligibility. If you have a history of overdrafts or unpaid bank fees, you might find it hard to get approved for an HYSA. But a second-chance banking account can help: The Chime® HYSA*, for example, offers a lower APY but Chime doesn't run applicants through ChexSystems.

While HYSAs can grow your money quickly, they have their limitations: Some require a minimum opening deposit or balance requirement to earn a higher yield, and others charge banking fees for overdrafts or out-of-network ATMs, or they limit how many withdrawals or transfers you can make in a month.

You may be able to avoid these drawbacks by maintaining a certain minimum balance, but be sure you know what the requirements are before opening an account.

Institutions have different rates and requirements for their HYSAs, so shop around to find the best one. Factors to consider include:

• Interest rate: Some accounts offer higher yields than others, which means a more significant return on your savings. Remember, however, that interest rates fluctuate over time.
• Deposit requirements: As with other savings accounts, many high-yield savings accounts require a minimum deposit, which could range from $0 to over $100. Be sure that you're able to meet the account's applicable requirements.
• Fees: Account fees, including maintenance fees, overdraft fees and ATM fees.

You should be able to apply online or in person, depending on the institution.

To use a high-yield savings account, you should first identify what you're saving for. HYSAs are a great place to build an emergency fund, for example, because you can easily access your money while still earning interest. Ideally, an emergency fund should cover about three to six months of your expenses.

For longer-term goals, such as buying a car or making a down payment on a home, CDs may be a better option. That's because the best CDs earn interest rates comparable to HYSAs, with the added benefit of locking in the CD's APY when you fund it. If you know you won't need your money until the future and you want to avoid fluctuating interest rates, a CD is a better fit for your savings.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every savings article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of banking products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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*Chime is a financial technology company, not a bank. Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC. *The Annual Percentage Yield ("APY") for the Chime Savings Account is variable and may change at any time. The disclosed APY is effective as of September 20, 2023. No minimum balance required. Must have $0.01 in savings to earn interest. *SpotMe® on Debit is an optional, no fee overdraft service attached to your Chime Checking Account. To qualify, you must receive $200 or more in qualifying direct deposits each month and have activated your physical Chime Visa® Debit Card or Credit Builder Visa® Credit Card. Limits start at $20 and may go up to $200 or more based on account history and activity. SpotMe won't cover non-card transactions. Terms apply.