CD Rates: Searching High and Low

2009 will go down as the lowest year in memory for bank rates. However, this makes it a great time to shop for CD rates and other bank rates.

When bank rates are low, shopping for an above-average rate becomes an imperative. It can add significantly to the interest that you earn and may well make the difference as to whether your deposits keep up with inflation.

Nowhere is shopping for rates more important than with longer-term CDs. After all, a savings account or money market account can be changed at any time if you find a better rate. With a longer-term CD, you are locking yourself in for a period of years. Given the length of that commitment, you'd better go into it knowing you've found a good deal.

Why a Long-Term CD May Make Sense

A discussion of shopping for longer-term CD rates starts with one very important assumption--that you've already concluded a multi-year CD is the right vehicle for your needs. There are arguments against locking in to a CD when bank rates are so low, but there are situations when it can make sense.

For example, if you have a planned expenditure in five years, and a CD invested at today's rates will give you the amount you need for that expenditure, a CD can be a very prudent investment. Other strategies might earn you more, but they also might fail to guarantee you a rate of return and that the money will be available when needed. So, when targeted for specific needs, long-term CDs can make sense, even in a low-rate environment.

Better CD Rates Make a Difference

A key to a low bank rate environment, though, is to make sure you find the best rate you can. Here's an example of how shopping actively for the highest interest rates on CDs can make a difference:

According to the FDIC, in the last week of December 2009, the national average for a 5-year CD rate was 2.13%. During that same week, on Money-Rates.com you could have found a number of 5-year CD options yielding 3.25% or better.

Given the above figures, if you were looking to invest $100,000 for use in 5 years, how much difference would it make to shop for one of the top rates, as opposed to simply settling for the average? After 5 years, a $100,000 CD at the average rate of 2.13% would have earned you $11,113.46 in interest. On the other hand, if you had shopped for a higher rate and invested your $100,000 at 3.25% for 5 years, you'd earn $17,341.14 in interest.

The difference comes to $6,227.68. It's hard to imagine a situation where that amount of money couldn't come in handy. If you were saving to buy a house, an extra $6,227.68 could help you furnish a couple of rooms. If you were saving to send a child to college, that extra amount could pay for books and supplies.

The point is, even in a low bank rate environment, it pays to shop around--especially with longer-term CDs, which involve committing to a rate for a period of years. In fact, a low bank rate environment makes the extra dollars you can earn by smart shopping all the more precious.

 

Source:

Weekly National Rates and Rate Caps • http://www.fdic.gov/regulations/resources/rates/index.html • Federal Deposit Insurance Corporation

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