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Certificates of deposit (CDs) are popular, low-risk investments for people who have cash that they do not plan to use immediately. CDs typically earn more interest than checking accounts, and they can mature in as little as one month. One of the key decision points for making this type of investment is maximizing CD rates.
Who Offers the Best CD Rates?
Choosing the best CD can be confusing, since credit unions, local banks, and national banking giants all compete for customers' money. The company offering the best CD rates can change at any moment, depending on the economy, local market conditions, the company’s financial stability, and other issues.
To receive the highest CD rates, keep in mind the following factors:
- Variable rate CDs can offer high gains during economic booms and disappointments during recessions. Variable rate CDs are tied to Treasury rates or to a particular index, so the interest can increase or decrease. Some companies adjust rates on a preset schedule while others modify rates daily.
- Early withdrawal penalties can negate interest payments. A CD is a commitment to hold money with a bank for a specified period of time. If you choose a long-term CD because of its high interest rate and then close the account early, you may end up worse off than before your initial investment.
- Renewing a CD with the same bank year after year may cost you money. Do not assume that, because a particular institution offered the best CD rates one year, it will continue to be the best option for every subsequent renewal. Research CD rates and shop around if you plan to reinvest CD funds.
- If two CDs advertise the same interest rate, the account that compounds more frequently will earn more interest. For example, a 2% CD compounding daily will reach a higher balance than a 2% CD compounding annually. The compound interest formula is explained here.
Tips to Avoid Hidden Disasters
Even CDs offering the best rates can have clauses buried in the fine print that leave you exposed to unnecessary risk. According to the Federal Deposit Insurance Corporation (FDIC), some common traps to avoid are:
- Companies advertising high interest rates with ambiguous CD terms. Organizations may use high initial CD rates as a marketing ploy to attract new customers and sell add-ons or other investment products.
- Call features that are not clearly presented upfront. Call features are one-sided clauses that give the bank the right to end the CD early. While you will be paid for any accrued interest, you may end up in a market with lower CD rates than when you began your original contract.
- Companies offering great CD rates without actually being banks. The FDIC insures deposits in banks and thrift institutions for up to $250,000. If you invest with a company that is not truly a bank and the company fails, you risk losing everything.
Through basic research, you can find the best CD rates in a contract that meets your needs.
