Beyond the obvious: 4 CD considerations besides interest rates

MoneyRates.com makes it easy to compare interest rates on CDs, and that's a good starting point when it comes to choosing a CD. However, before you commit, you may want to look a little more closely. The highest rate doesn't always make for the best choice.

Since interest rates on CDs are less than inspiring these days, banks are tweaking other features to attract depositors. This gives you more options when choosing CDs. Here are four things besides rates to consider:

1. The trade-off between term and CD rates. The most common trade-off between CD features and rates is the fact that longer-term CDs pay more than shorter-term ones. This choice is more difficult now because CD rates are so low--locking into a long-term CD below the rate of inflation is not an attractive proposition. The decision is made even more complicated by the fact that some banks have introduced unorthodox CD term lengths, such as 11 months rather than a year. The best way to make those comparisons is to bracket them with the closest alternatives you can find, one shorter and one longer.
2. Step-up features. Some CDs give you a limited number of opportunities to "step up" your rate during the term of the CD: If rates rise, you can take these opportunities to reset your rate. Just be aware of three things when evaluating this option: how much you are giving up in your original CD rate to get the option; how long you have to wait before you can exercise the option (the further into the CD's term you have to wait, the less valuable the option is); and whether there are any limits on how big a step-up in rates you can make.
3. Automatic rate increases. Rather than giving you an option, some CDs are designed to automatically increase in rate throughout the term. This is a bit gimmicky--it requires you to calculate an average CD rate over the full term of the CD, so you can make reasonable comparisons with CDs of comparable length.
4. Early withdrawal penalties. As a practical matter, the penalty for early withdrawal is what really limits your flexibility when you sign up for a long-term CD. The lower the penalty, the more flexibility you effectively have. Looking for low penalties is an especially good idea when interest rates are historically low--there is a greater possibility that a rise in interest rates would make it worth paying the penalty. Also, look for penalties which diminish as time goes by--they may let you get the equivalent of a medium-term CD at long-term rates.

Naturally, if you can get a competitive rate on a CD and the extra features you want, then those features are well worth having. More often, though, you'll find that those added features come with lower CD rates. In that case, you have to look at the difference in CD rates as the price you are paying for those features. Figure out what those features are worth to you, and decide whether the lower CD rate is a fair price to pay for them.

At a time when interest rates on CDs are extremely low, you may find that the added features are more attractive than the CD rates themselves.

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