The traditional certificate of deposit (CD) is often considered an unattractive savings option due to its rigid rules. But, the times have changed as CDs are becoming more flexible. Have you considered these new-age CDs?
Concerns: Liquidity and Rising Rates
Most banking customers have two primary concerns with a traditional CD: (1) they are prohibited from withdrawing their money for a long period of time and (2) they face the possibility of less-than-optimal returns in the event of rising rates. Therefore, the preferred alternate no-risk savings vehicle is a high-yield online savings account.
Savvier banking customers who seek higher returns from CDs will utilize a strategy known as CD laddering to optimize their savings yields without forfeiting too much liquidity. The problem with a CD ladder is that it is most appropriate for those with plenty of cash and a long-term horizon.
Luckily for the remaining banking customers with savings commitment issues, CDs have evolved into a financial product that allows those with a small amount of funds and a short time-frame to chase higher returns.
The No-Penalty CD
If you hate the fact that your money is locked for months or years at a time (unless you pay a penalty charge), you might find no-penalty CDs to be a great option. A penalty-free CD allows the depositor to withdraw their balance without incurring the typical penalty charge (some restrictions may apply).
Some no-penalty CDs are known as “liquid” CDs, which allow you to take out money before the CD matures. Liquid CDs may require you to withdraw the entire balance when you opt for an early withdrawal or cut the interest rate when you withdraw.
The usual downside is a lower APY compared to a traditional CD. For example, Ally Bank offers its 11-month No Penalty CD with a rate of 1.19% (1.20% APY) while its High Yield CD has a rate of 1.28% (1.29% APY).
The Bump-Up CD
The other major worry for a CD depositor is the chance of increasing interest rates in the future. American Express National Bank may be offering a tempting 1.55% APY on a 2-year CD now, but a recovering economy could mean higher interest rates in the near future.
Savers don’t like to see themselves stuck on a lower interest rate when they could be earning more interest on their savings. Bump-up CDs were introduced to cater to banking customers who don’t want to put themselves in this predicament.
A typical bump-up CD allows the depositor to exercise one or two rate increase options. So, when customers see that rates have gone up, they can call the bank to increase their rate to match what the bank is currently offering.
Be aware that some banks may dictate that you can opt for a rate increase after you’ve funded CD for a specific period of time or they may extend the term of the CD after you request the rate increase.
A popular of a bump-up CD is Ally Bank’s Raise Your Rate CD, which is a 1.56% APY 2-year CD with a one-time option for a rate increase.
*All rates are stated as of 12/13/2010.