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Rising-rate CDs: Should you trade money for flexibility?

May 18, 2011

| Money Rates Columnist

If you're watching the economy and starting to lose interest in traditional certificates of deposit, you're not alone.

According to the daily American Banker newspaper, banks have noticed their customers' tepid interest in CDs and have started to introduce a variety of alternative rising rate CD products, including liquid CDs, step-up CDs and bump-up CDs. None of these is offering a mind-blowing interest rate, but the wide variety of terms and conditions are guaranteed to make shopping for the best CD rates more interesting.

Why consider rising rate CDs?

Rising rate CDs allow investors to raise their rates or withdraw their money early without a significant penalty if interest rates climb, as they are expected to do in the coming months. Some are worth considering, the experts say, but in some cases, you may find you're better off with an online savings account, a high-yield savings account or an interest-bearing checking account. It's also a good idea to check money market rates before putting your money in a rising rate CD.

As the San Francisco Chronicle recently noted, traditional one-year certificates of deposit are paying 1.2 to 1.3 percent annually these days while an online bank may offer an online savings account or money market account with 1 to 1.2 percent yields. So if you need to keep your money liquid, keep your options open.

CD alternatives, risks and rewards

Another type of rising rate alternative--the step-up CD--raises the interest rate of a deposit at a predetermined point in time. Most won't beat the steady growth of a traditional CD, however, so chose carefully from this category. Bump-up CDs let you raise the rate at least once and sometimes more during the CD's term--a good idea if interest rates jump dramatically.

As always, it pays to shop around and to always compare gimmicky products to traditional products or a new online savings account or checking account. Before transferring any money, make sure you understand the terms. Don't put your money into a high-maintenance account unless you're willing to commit the time needed to watch interest rates maximize your return by making the right move at the right time.

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