CD Rates: Five Ways to Reduce Rollover Shock

If you have a long-term certificate of deposit due to mature sometime soon, you may be in for a bit of a shock when it is time to renew your CD. Interest rates on CDs have fallen precipitously over the past few years. At this time, there is no way to get back to the CD rates of just a few years ago. However, there are five things you can do to minimize that rollover shock.

1. Make sure your CD is not slated for automatic rollover. Some banks will set CDs up for automatic rollover. This is billed as a convenience to the customer--though also conveniently for the bank--it can also quietly re-commit your money. Under some conditions this might not be a big deal, but right now CDs are at record low levels. You should make some active decisions about how to roll over your CD. As the due date approaches, contact your bank to make sure it does not get rolled over automatically
2. Consider shorter-term CDs. This may seem counter-intuitive because as low as CD rates are across the board, they are especially low for shorter-term CDs. However, if you consider how unusual the current level of CD rates are, plus the fact that both the economy and inflation seem to be at turning points, you might want to avoid locking up money at today's rates for very long
3. Look outside the box--consider alternatives to CDs. While you are considering shorter-term CDs, you might also want to consider alternatives such as a savings account. Right now, savings account rates are on par with short-term CD rates. You might consider using a savings account as a way of keeping your money flexible while not sacrificing on interest rates
4. Shop actively for CD rates. This goes for CD rates and savings account rates--depending on which vehicle you choose. A key reason for not automatically rolling over your CD with your current bank is to allow you to shop actively for the best bank rates available. Economic and financial conditions are in a state of change, which can mean that rates offered by different banks vary greatly. Only active shopping can ensure that you get a competitive deal, so use Money-Rates.com to see a wide field of possibilities
5. Pay special attention to early redemption penalties. While there is an argument to be made for choosing the flexibility of short-term CDs or a savings account, you might find the higher yields of long-term CDs impossible to pass up. If so, pay attention to the early redemption penalties on the CDs you consider. If everything else is roughly equal, choose the CD with a lower penalty. This may help you keep your options--if CD rates rise sharply and all of a sudden that 2.5% you locked into for four years doesn't look so good, a lower early redemption penalty would give you more latitude to make a change

Locking into a CD is always an important decision simply because it can be a commitment of months or years into the future. When CD rates are low and the economic situation is in flux, making that kind of long-term commitment requires greater care than usual.

Source:

• Federal Reserve: http://https://www.federalreserve.gov/datadownload/DownloadTable.aspx?rel=H15&series=763eaf964117358cf154951d3ef89f97&lastObs=&from=01/01/1964&to=11/30/2009&filetype=spreadsheetml&label=include&layout=seriescolumn

 

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