Certificates of deposit (CDs) give consumers the chance to earn a secure return on their extra cash. By committing to a CD for the long term, you can earn more interest than you would from a savings account.
Getting money out of a CD can be difficult or expensive, so getting a good interest rate is important.
Banks publish their CD interest rates, but it may be possible for you to get an even higher rate by following these tips.
What is a CD?
A certificate of deposit is an agreement that you make with a bank.
You promise to give the bank a specific amount of money for a set period of time. In exchange, the bank gives you a guaranteed interest rate for the life of the CD.
For example, you may open a 3-year CD with a $1,000 deposit. In exchange, the bank agrees to pay 2% interest on the balance.
After 3 years, you’ll receive $1,061.78 from the bank.
Banks offer better interest on CDs than they do on savings accounts. The higher rates are in exchange for your promise to leave the money in the CD for the CD's full term.
With a savings account, you can withdraw your money at any time. CDs place restrictions on withdrawals.
These withdrawal restrictions help the bank make more money, which is how they can offer better interest rates. When you deposit money at a bank, you’re effectively loaning that money to the bank.
The bank will use the money you deposit to fund its other activities, including lending to its other customers.
Your deposit will be used to offer mortgages or auto loans to customers, who will pay the bank interest on the money they borrow. The bank makes money using your money. The interest you earn is your cut of the bank’s earnings.
By getting you to agree to keep your money in a CD for a certain amount of time, the bank can better estimate how many loans it can make. If someone withdraws a lot of money from their bank without warning, it can throw off the bank’s lending plans.
Knowing exactly how much money is available to lend helps the bank make more money.
If you do have to withdraw money from your CD before the CD’s term ends, you’ll have to pay a fee. The early withdrawal fee will be based on the term of the CD, with the fee being larger for longer-term CDs.
Usually, the fee is equal to a certain number of months of interest. The fee can wipe out the benefit of the CD’s higher interest rate, so make sure you can commit to the CD’s term before you open one.
How to Boost Your Rate
If you’re committing to a CD, especially one with a long term, you want to make sure you get the best rate possible.
These are some ways that you can get a higher rate on your CD:
Rate renewal bonus
Banks like it when their customers deposit money. The more money a bank has in its coffers, the more loans it can make.
The more loans a bank makes, the more money it brings in. The amount of money deposited at a bank has a direct relationship to how much money the bank is able to make. That’s why banks work so hard to gain new customers.
Banks also work to make sure they keep their existing customers. If new deposits result in higher potential profits for the bank, someone withdrawing their money results in lower potential profits. Many banks offer deals to people who renew the CDs.
If your CD’s term is about to expire, contact your bank to ask about a renewal bonus.
Usually, if you leave your CD alone after its term ends, it will automatically renew with the same term and the current market rate.
If you call to ask about a renewal bonus, the bank may offer a higher rate to make sure it keeps your money on deposit.
Ally Bank is known to offer CD rate renewal bonuses.
As was just mentioned, banks want to encourage new customers to make deposits.
Many banks offer sign-up bonuses for their checking and savings accounts and advertise them heavily. You can often find similar deals for CDs.
Look for banks that advertise CD sign-up bonuses. You might be able to get a cash bonus based on the amount of money that you deposit, or secure a higher interest rate.
Put down a higher deposit
Another strategy for getting a higher interest rate on your CD is to make a larger deposit. Banks commonly offer different interest rates for different balances. The higher the balance, the more interest you’ll earn.
If you have a large amount of money that you’re planning to put in a CD, shop around at different banks. You may find one that offers an interest rate bonus for larger deposits.
Banks like to keep their customers happy, so they often reward customers in various ways. People who have worked with the same bank for a while, or who have a lot of money at the bank, can get all sorts of benefits.
Check out the CDs that your bank offers and see if they have some kind of relationship benefit. You might have to open a specific type of checking or savings account or meet a total balance minimum.
Whatever the requirements are, meeting them can get you a better interest rate, and possibly other perks.
Many banks offer special CDs that have rates that are higher than the usual rate. Often, these CDs have non-standard terms.
Most CDs have terms that come in six or twelve-month intervals, but special CDs can come with any kind of term.
CD specials are often marketed as being for something like summer vacation saving or saving up for Black Friday, with their terms ending right as these events approach.
You’re not obligated to use the money you deposit in the way that the bank is marketing, so keep an eye out for these kinds of deals, even if you want to do more general saving.
You’ll never get anything that you want from your bank unless you ask for it. If you want to open a CD, reach out to banks and ask about the options that are available. You might learn about a special deal that you can take advantage of.
It’s also worth simply asking if the banker you’re working with can do anything to give you a higher interest rate. The worst thing that can happen is that the banker will say no.
It’s possible that they may be able to do something to help you out or tell you ways that you can get a higher rate. In either case, asking for a better rate can’t hurt.
Local banks and credit unions are your best bet for this method.
Is it Worth Making an Early Withdrawal to Get a Higher Rate?
If you already have money in a CD, you may be wondering if it is possible to increase your interest rate in any way.
In general, the money you deposit to a CD is locked-in at the rate that was offered when you made the deposit. Some banks offer CDs that have a rate-increase option, but these are far from the standard.
That leaves you with one option if you want to increase your CD’s interest rate: making an early withdrawal and opening a new CD.
In the vast majority of cases, this will not be worth it. The penalty for making an early withdrawal will be far more than the additional interest you’ll earn over the remainder of the CD’s term.
The only time it would make sense is if you have a CD with a large amount of time remaining and CD rates have increased considerably since you opened the CD.
Finding out whether it’s worth making an early withdrawal and opening a new CD requires a bit of math.
First, calculate what your final CD balance would be if you left your CD alone. Next, calculate what the penalty will be if you pull your money out of the CD early. Subtract the penalty from your current CD balance, to find the amount of money you’d be putting into the new CD.
Once you’ve done that, calculate what the final balance of your new CD would be when the term ended. Remember, you’ll want to open a new CD with a term equal to the term remaining on your current CD.
If the ending balance would be higher if you made an early withdrawal and opened a new CD is higher, then doing so is worth it. Otherwise, keep your existing CD.
The cases when making an early withdrawal to open a new CD is beneficial are few and far between, but knowing how to calculate whether it’s worth it is still useful.
CDs are a great way to earn a steady, guaranteed return over the long term.
Use these tips to get the best interest rate possible.