Declining CD Rates Raise Important Questions for Depositors

CD rates declined in August--again. With average 1-year rates now approaching 1%, it might be easy to dismiss CDs as not being worth the commitment of locking up your money, especially when savings account rates can earn you just as much, if not more. Still, there may be more value in those CD rates than meets the eye--at the very least, it is worth asking some key question before you eliminate CDs from your list of possible deposit vehicles.

Here are some questions about CD rates which can prompt some revealing discussions:

• Can it be worth locking in for a year or more at low CD rates? If you think not, imagine having this discussion a year ago. Back then, 1-year CD rates were substantially north of 2%. That seems great now, but at the time it was lower than most people had ever seen CD rates. One could easily have rejected the idea of locking in CD rates that were near all-time lows, but it would have turned out to be a smart decision. Just because rates have never been lower, don't assume they can't get lower still.
• Will deflation continue to make these rates worthwhile? The Consumer Price Index declined by 2.1% over the past year. That does two things. It makes even a low CD rate worthwhile because falling prices mean increased purchasing power. Also, a deflationary trend raises the possibility that interest rates could fall farther still. The inflation/deflation issue should be at the center of any decision you make about CDs.
• If savings account rates are higher, what's the value of a CD? A savings account is an attractive alternative right now--many savings account rates are competitive with or even higher than CD rates, so why lock in your money? The answer is that savings account rates can rise or fall at any time. This comes back to the above inflation/deflation discussion--if you come down on the deflation side of the fence, locking in an interest rate has more appeal.
• Why settle for an average CD rate? Looking at averages is helpful for understanding industry trends, but when it comes to choosing individual products, you should be able to do much better. MoneyRates lists some CD rates that are about twice the national average.
• Is there anything else that can be done to get a higher CD rate? Besides shopping around on MoneyRates, is there anything else that can be done to get a higher CD rate? One possibility is to take advantage of the increase in the FDIC insurance limit to $250,000. Some banks offer higher rates for larger depositors. If you have the means to pool your assets, consider doing so, up to that $250,000 limit. It's safe to do so, and could make you eligible for special CD rates and other offers.

Certainly, CDs are a tough sell when rates are around 1%, but then again, there aren't too many attractive places to put money these days. The point is, this is a unique environment--it deserves asking a few questions before making decisions based on face value.

Source:

• Bureau of Labor Statistics: http://www.bls.gov/news.release/cpi.nr0.htm

• American Banker: http://www.americanbanker.com/issues/174_168/infographic_annuity_cd_rates_decline-1001544-1.html