Seeking the best CD rates? Here’s how to shop
by Robert Beaupre | Money Rates Columnist
Searching for the highest yield possible on a certificate of deposit (CD)? You’re not alone.
CDs have been a banking staple for decades. Fortunately for CD shoppers, these accounts can be simpler to evaluate than other vehicles. Unlike savings, money market and checking accounts, CDs aren’t designed to handle frequent transactions. As a result, things such as service fees and accessibility are rarely a consideration when choosing a CD.
Instead, what typically matters most in CD shopping is the account’s interest rate.
Article continues below table.
5 Yr. Term
Rates as of 1/27/2015 See more rates 5 Yr. Term
Rates as of 1/27/2015 See more rates Rates / APY terms above are current as of the date indicated. These quotes are from banks, credit unions and thrifts, some of which have paid for a link to their website. Bank, thrift and credit union deposits are insured by the FDIC or NCUA. Contact the bank for the terms and conditions that may apply to you. Rates are subject to change without notice and may not be the same at all branches.
$25000 Minimum to earn APY
$0 Minimum to earn APY
5 Yr. Term
Rates as of 1/27/2015
See more rates
5 Yr. Term
Rates as of 1/27/2015
See more rates
Rates / APY terms above are current as of the date indicated. These quotes are from banks, credit unions and thrifts, some of which have paid for a link to their website. Bank, thrift and credit union deposits are insured by the FDIC or NCUA. Contact the bank for the terms and conditions that may apply to you. Rates are subject to change without notice and may not be the same at all branches.
A quick glance at the table above can offer you a sense of what yields banks are offering today. But before you plunk down your deposit with the highest-yielding account, there are a few things you should know about CD shopping. While the rate is likely to be the No. 1 factor in any decision you make on CDs, it shouldn’t be the only factor you evaluate in choosing a new account.
Here are some of the things rate hunters should keep in mind when shopping for CDs.
1. The opportunity cost
At first glance, locking into the highest CD rate available may seem like the way to go. After all, why would you opt for a lower interest rate when higher ones are readily available? While simply choosing the highest rate can make sense in some instances, the commitment involved in a CD adds some complications.
If you lock into a CD and interest rates stay the same or fall during the term, it’s no problem. However, if you lock into a CD and see rates climb in the months or years after, you’ll have little choice but to watch helplessly as other depositors take advantage of higher rates – unless you’re willing to break your CD, which will usually cost you a penalty of several months in interest, if not more.
Choosing the proper CD term involves considering what direction you expect interest rates will take in the future. If you’re confident that interest rates will stay the same or fall in the foreseeable future, locking into a longer term may make sense. But if you foresee interest rates rising in the near future, keeping your terms short may be the wisest course.
2. The penalty potential
Because they are influenced by countless factors, it’s hard to know which way interest rates will turn next. So what happens if you lock into a long-term CD and see rates rise soon after? You may still have some options.
If your CD has a mild penalty for early withdrawal, you may be able to break your CD and still come out ahead over time. For instance, say you open a two-year CD with an annual percentage yield (APY) of 2 percent and an early withdrawal penalty of six months in interest. But by the time you’re one year into that term, CD interest rates have climbed to 5 percent.
If you break your CD to open a new one with a higher rate, it will cost you half your interest to that point, effectively reducing your APY for the first year to about 1 percent. But, if you’re able to secure that 5 percent interest rate during the second year, your average APY for the two-year term will equal about 3 percent – or 1 percent more annually than you would have earned if you stuck with the original CD.
To make this a viable strategy, you should review the potential penalties before you open a new CD. If you find two CDs that are identical in most ways, compare their early withdrawal penalties. The one with the smaller penalty may offer you more flexibility if you need to exit the account sometime during the term.
3. The power of the ladder
If you’d like your savings to earn maximum interest while still maintaining some regular liquidity, a CD ladder may be the way to go. A CD ladder consists of multiple CDs with staggered maturity dates, which allows you regular, penalty-free access to a portion of your savings while still earning higher interest rates overall.
This is a great option if you intend to use or reinvest some portion of your savings on a regular basis, but don’t anticipate needing the whole of it at any given time. When done correctly, you can end up with a stable of long-term CDs in which at least one account reaches maturity every few months, offering you the option to access it or simply push it ahead to reach maturity at a chosen point in the future.
4. The risks and rewards of unconventional CDs
While traditional CDs are by far the most popular type, some banks offer their own twist on the usual product. A raise-your-rate CD is a special type of certificate that allows you to bump up your interest rate one or more times during the term (assuming rates have in fact risen), and indexed CDs forgo a fixed interest rate in favor of a variable rate that moves in accordance with a benchmark indicator.
Even more exotic, CDs that are denominated in foreign currencies allow investors to effectively gamble on the relative values of a nation’s currency. These vehicles may come with more risk than a typical CD though, as they may allow a loss in principal if the chosen currency loses value over the course of the term.
If safety and stability are paramount to you, a conventional CD may be your best choice – so long as you ensure that the bank you choose is insured by the Federal Deposit Insurance Corporation (FDIC). FDIC coverage is designed to protect funds up to $250,000 per depositor per institution in the event of a bank failure, and it has never failed to cover insured deposits since the FDIC’s inception in 1933.
FDIC-insured banks must display the FDIC emblem in their branches or, in the case of online-based banks, on their website.
Best CD rates found by users like you
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