"Raise Your Rate CD" Coming to a Bank Near You?

May 18, 2010

By Andrew Freiburghouse | Money Rates Columnist

Since its (re-)inception, Ally Bank has been aggressively positioning itself as a bank that offers uncommon service and products to consumers--including a no-penalty certificate of deposit (CD) that gives you better access to your funds.

Ally Bank's "Raise Your Rate CD" raises the bar for other banks who are likewise competing for deposits.

Raise Your Rate CD Offers Some Protection Against Higher CD Rates

Ally's Raise Your Rate CD is a two-year-term CD that pays a 1.99% APY at origination but then allows you to "bump up" to a new two-year Ally Bank CD if CD rates improve. You can only choose to bump up once throughout the life of the CD, and the rates quoted are all Ally rates.

The Raise Your Rate CD can be a very appealing product for CD rate watchers who would like to get their money into a decent near-2% CD but don't want to be locked into that low rate if in fact interest rates on CDs do rise within the next two years, as many expect them to do.

Will Flexible CD Rates and Terms Become a Trend?

This CD product meets a consumer need: There is a segment of bank depositors who are hesitant to buy a 2-year CD when the immediate future of interest rates is so uncertain and who will be attracted to a CD with some protection.

Other banks may want to follow suit. Certainly it is worth watching whether or not this CD product gathers a significant following.

Your responses to ‘"Raise Your Rate CD" Coming to a Bank Near You?’

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nate

13 March 2012 at 10:11 pm

Raise your rate CDs are an excellent product for those savvy investors completely incapable of basic math skills and/or lacking the ability to open a book. A quick view of BankRate's CD rates makes it obvious that Ally routinely offers a slightly lower interest rate than similarly termed CDs. The saying, "there's no such thing as a free lunch" comes to mind here. So here you are, the average investor, voluntarily buying this below market rate CD, in the delusional hope that CD rates are going to skyrocket the month after you invest, and you'll be the "superinvestor" that gets to step up his rate and beat the bank. Unfortunately, a quick review of almost any period in history would reveal that rates VERY RARELY change rapidly or significantly. More likely, if you're lucky, a year after you purchase your CD, rates will be a paltry 0.25% higher. You'll "raise your rate", and what you'll end up with is the same rate that everyone else had to start with. But, of course, you'll only have been collecting that rate for a year, whereas all the plain-jane CD investors had been collecting that rate for two years. Having the unfair advantage of hindsight on my side, we now (2012) know that over the past three years, there are probably very few people that raised their rates at all. And even those that did, probably still came up short. Rates have done nothing but fall for the past 3 years. And another thought... Most of the "good" CDs out there only have a 60 day interest penalty for early withdrawal. So even if rates did magically skyrocket from 1.15% up to 5%, the cost to bail on your non-"raise your rate" CD would only be 0.19% (+/-). Ironically, that's also about how much less interest Ally's CD pay than it's competitors. At the end of the day, Ally Bank is a FOR PROFIT organization, just like any other. If they didn't see the "raise your rate" CDs as a way to increase their profits, they wouldn't sell them. They know how to make money, and for that I commend them. What's truly magical is that they know how to fleece you and at the same time make you think that they are doing you a favor. In this current market environment, there simply is no reasonable scenario in which these CDs shine. And while I can cook up some hypothetical scenarios that would favor these CDs, it would require conditions that have almost never existed in history. Stop being greedy. Stop throwing away a quarter in pursuit of a nickel. Do the math. Good luck.

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