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How to shop for CDs in 2012

February 10, 2012

| MoneyRates.com Senior Financial Analyst, CFA

The last few years have been grim for CD rates, so what kind of start is 2012 off to? More of the same, unfortunately.

According to national averages from the FDIC, interest rates on CDs fell almost across the board in the first month of the year. Only 3-month CDs were spared, holding steady at 0.14 percent. Otherwise, declines ranged from 0.01 percent in the case of 1-month CDs, to 0.03 percent in the case of 5-year CDs.

Obviously, it's a tough environment for CD rates. Given that, here are five things you should know when choosing a CD now:

  1. One-month CDs don't make much sense. 1-month CD rates have now dropped to an average of 0.09 percent, which is below the average for savings accounts and money market accounts. One theoretical advantage of a CD is that locking in your money can protect you from rate declines, but that wouldn't be worth much in this situation. After all, the closer CD rates get to zero, the less chance they have of declining further, and in any case, one month worth of rate protection is of little value. Choose a longer-term CD for a higher rate, or if you can't afford to lock up your money for that long, consider a savings or money market account.
  2. The 1-year term is the sweet spot for jumbo CDs. If you are looking to make a large deposit -- in excess of $100,000 -- then you should know that 1-year CDs offer the highest premium for jumbo CDs. On average, 1-year CDs offer an extra 0.03 percent for jumbo CDs. On CDs of other lengths, this premium is only 0.01 or 0.02 percent.
  3. Shopping for CD rates is still critical. You have to fight the tendency to just give up because the rate environment is so low. No, you won't find a rate anything like you could a few years ago, but you might do three or four times better than the average rate if you shop around.
  4. Don't automatically roll over your CDs. Interest rates on CDs were still pretty healthy five years ago, so anyone who has a 5-year CD maturing this year might be in for a shock. Because the environment has changed so radically, it is especially important not to let your bank automatically roll over your CD. Not only should you take the opportunity to shop around for better rates, but you may want to consider a shorter CD. In retrospect, locking into a long-term CD would have been a brilliant move five years ago; today, it may be the opposite.
  5. Consider penalties prominently when shopping for CDs. Speaking of locking into CDs, the penalties for early withdrawal determine just how locked in you are. In some cases, these penalties are low enough that you can choose a longer-term CD for the higher rate, and still come out ahead by paying the penalty to get out if rates rise strongly.

More than savings accounts or money market accounts, CDs require a judgement not only of conditions today, but a perspective on what interest rates will do in the months or years ahead -- perhaps as much as five years into the future. Be sure to take into account all of the above factors before you make this judgement.

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