Can I trust the best CD rates?
November 30, 2011
Q: I just saw a bank advertising a 1.75 percent rate on a 13-month CD. When you see a rate being offered that is so much above other rates, can you trust it?
A: According to the FDIC, the national average for a one-year CD is 0.35 percent. Even if you shop for the best CD rates, you would be unlikely to do much better than 1 percent at around the one-year duration. So, 1.75 percent is definitely outside the normal scope of today's CD rates. However, that does not necessarily mean it is too good to be true.
An extraordinary CD rate may come with strings attached. Here are three things to look for when a bank is offering an unusually high CD rate:
- You may be required to open another type of account. This means you have to evaluate both accounts as a pair. For example, it may not be worth getting a little extra interest on a CD if it also means you have to sign up for a checking account that charges monthly maintenance fees.
- There may be a low maximum amount that qualifies for the fee. A bank may offer a splashy CD rate, but limit it to balances of $5,000 or less. This way, the bank gets to look like it has the best CD rates, without having to actually pay out much interest at those rates.
- The rate may apply for a limited time only--which is less of a problem if you can lock that rate in for the term of a CD.
In a situation like this, the two things you should do are 1) go to fdic.gov and confirm that the bank in question is an FDIC-insured institution, and 2) carefully review the terms and conditions that the bank requires of depositors in this product, to make sure you can live with them.
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