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Personal Finance Blog By MoneyRates - May 2009

Multiple Signs Point to Increased CD Rate Volatility

May 27, 2009

| MoneyRates.com Senior Financial Analyst, CFA

They seem like unrelated stories, and none has really grabbed leading headlines:

As isolated as these stories may seem, they all add up to one thing: the prospect of increasing volatility in interest rates for certificates of deposit and other bank deposit accounts.

The first story was widely dismissed as not being a serious threat to the U.S. dollar, but consider it a warning shot across the bow. Whether it is via a proposal like China's or other means, if the U.S. budget deficit continues to spiral out of control, global investors and financiers will eventually vote with their feet.

As for the bounce in oil prices, it is just a reminder of how unusual the mild deflation of the past year has been. Just as oil led general prices on their way down, it will now put upward pressure on consumer prices.

The third story -- rising Treasury yields -- is really a reflection of the first two. Falling confidence in the U.S. dollar and a revival of inflation concerns are bound to drive Treasury yields higher.

Will this result in higher CD rates? Keep your eyes open, because changes can be fast and furious in this type of economy.

Posted in: Miscellaneous

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Do You Have What it Takes to Earn 5% on Your Checking Account?

May 26, 2009

By Clark Schultz | Money Rates Columnist

Reward checking. You have probably heard the term by now, but should you sign up for one? If you like the thought of earning 5.01% instead of 0.51% , maybe the answer is yes. A reward checking account is a FDIC-insured checking account that pays a higher rate of interest to customers who meet certain preset monthly requirements. Most banks limit the dollar amount to which the highest yield applies ( in many cases $25,000), although you can find reward checking account which pay the highest-tier yield all the way to $50,000 or even $100,000. So what's the catch? The devil is in the details and for reward checking accounts the details can require a lot of diligence. Reward checking account requirements typically include some combination of the following:

- Receiving electronic statements

- Significant check card or debit card activity each month

- Receiving recurring direct deposits

- Paying bills online or setting up auto-debits

If you read through this list and are completely unfazed, then you are well-suited for a reward checking account. However, if conducting your banking online is foreign to you a reward checking account can be a major lifestyle change. The pressure to meet the monthly criteria can be significant. Who wants to earn 0.10% ( a typical rate for not meeting a bank's monthly requirements) instead of the lush 4% and 5% reward checking rates that are available in most states? Probably not anyone. But just make sure you understand the banks will make you work for it. Check the MoneyRates.com Reward Checking Page for some specific information about rates and requirements on reward checking accounts.

If you decide that reward checking is not for you, chances are that you know someone who would relish the conversion to online banking. Even a college student who only keeps a few hundred dollars in their checking account could be a candidate. So even if you divine that you do not have what it takes to grab the high checking rate, let someone else know about it. Reward checking is here to stay. Make the banks pay.

Posted in: Checking Accounts

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Looking a Gift Horse in the Mouth: Thoughts on Extending FDIC Insurance Coverage

May 25, 2009

| MoneyRates.com Senior Financial Analyst, CFA

Last week, President Obama signed a bill which extended the $250,000 ceiling on FDIC deposit insurance through the year 2013.

Until late last year, the limit had been $100,000. It was then increased to $250,000 to shore up depositor confidence in the midst of the banking crisis. This was supposed to be a temporary measure, through the end of this year, but now it has been extended for four more years. Realistically, it's now hard to envision the limit reverting back to $100,000.

For people with savings accounts, certificates of deposit, checking accounts, money market accounts and any other eligible deposit accounts, this is obviously nothing but good news in the short term. It allows them to invest with confidence, and without having to spread deposits around so much to keep accounts under the insured limit, or worry about how the terms of their certificates of deposit mesh with the expiration of the higher limit.

For the government, this is a step to further bolster confidence in the banking system, and one which does not appear to have an immediate cost. And there's the rub. Guarantees cost nothing when they're first made, but as we've found out over the past year, they can become extremely costlywhen things go wrong. So, call this one a short-term gain for depositors, but possibly a long-term loss for taxpayers.

Posted in: Miscellaneous

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Credit Card Reform Passes Congress with a Surprise Amendment

May 21, 2009

By Clark Schultz | Money Rates Columnist

Credit card reform appears close to a reality now that both the House and Senate have passed a final version of the bill. The credit card industry can expect new regulations as soon as next week, when President Obama is expected to sign the bill into law. The credit card reform bill did not make it through the Senate without a shocking amendment added to the House version. The ability to carry concealed weapons in national parks was the concession made to Senate Republicans and the strengthening gun lobby in the United States. Guns in Yellowstone apart, the credit card bill is consumer-friendly. Some of the new rules that credit card companies will have to follow include:

- Rates, terms, and card changes must be easy to understand and available for review

- No rate increases on existing balances unless the account is 60 days past due.

- Rate increases for new balances require a 45-day notification period.

- No cardholders under the age of 21 unless a joint account is opened with a consenting adult

- No fees for exceeding a credit limit unless authorized by the cardholder

- Interest rates cannot be raised within the first year after a new credit card account is opened

- Credit card bills must be sent at least 21 days before the due date of the bill

The banking industry is howling over the new legislation, but the changes are not a surprise. Americans overextending their credit cards has been a big problem in this country and one that banks and credit card companies have taken advantage of. While predatory credit card practices may be reeled in, banking lobbyists claim that credit card rates and fees will be forced higher to compensate for the lost revenue. Don't count on it, credit card deals will still be around. So while your local bank may charge you higher rates of more fees, as long as you use a site like MoneyRates.com or Cardratings.com you can stay on top of the latest credit card deals available.

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Thinking Ahead: Inside the Inflation Numbers

May 20, 2009

| MoneyRates.com Senior Financial Analyst, CFA

April's inflation number (CPI), released last week showed a year-over-year decline in consumber prices of 0.7%. Prior to March, year-over-year inflation hadn't been negative since 1955. Now we've seen it happen for consecutive months, and the bigger decrease in prices through the end of April might seem to suggest that the pace of deflation is accelerating.

The numbers, however, deserve a closer look.

If deflation really takes hold, it can make seemingly low CD rates much more palatable. At the same time, CD buyers don't want to become complacent. If you look at the detail of the inflation numbers, there are a couple of red flags that suggest deflation may not be here to stay:

  • The real declines in prices were in late 2008, not this year. They are only showing up in the year-over-year numbers now because some rather high inflation months are starting to drop out of the 12-month trailing period.
  • The year-over-year decline in prices through April was helped tremendously by a 25% decline in energy prices. Is this likely to be repeated over the next year? No. In fact, oil prices have been trending higher lately.

A revival of inflation would not just send CD rates (and interest rates generally) higher, but it would probably create a divergence in rates as different banks react at different speeds. Staying up-to-date and informed about certificates of deposit may be more important than ever in the months ahead.

Posted in: Miscellaneous

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