Consumers who begin their search for a certificate of deposit (CD) are likely to consider a big bank. It’s understandable — they probably already have an account with a big bank. But, while larger institutions may offer certain perks here and there, it is not the best place (financially) to open a CD.
At the top five banks in the U.S., the average 5-year CD rate is 0.74% APY (Wells Fargo does not offer a 5-year CD). Of the five banks, U.S. Bank offers the highest 5-year rate of 0.95% APY.
Compared to online banks, the banking giants cannot compete. Plenty of online savings accounts can provide better savings returns without the long-term commitment. Not surprisingly, online banks can do that because they don’t incur the costs of operating physical branches.
Despite higher returns at online banks, some consumers continue to maintain CD accounts with big banks for several reasons.
Occasionally, big banks offer special rates. Right now, U.S. Bank has a special 59-month CD rate of 1.50% APY. The balances in CDs may also count toward “combined balance” requirements needed to avoid monthly fees on other bank accounts, especially higher-tier accounts. Some customers do it because they believe in keeping money at a bank that lends to others in the community. Others are simply pressured into them.
Bank of America customers who opened a 10-year CD in July 2010 are earning 2.75% APY, which doesn’t look too shabby compared to the current low-rate environment. But, Ally Bank also offered a 5-year rate for 2.64% APY at the time.
If interest rates remain extremely low until the end of this decade, savers who went with super-long-term CDs may come out ahead because they locked in high rates early. But, the Federal Reserve recently announced that interest rates is projected to stay low until mid-2015 — with a slow rise to follow.
If you are looking to open a CD now, big banks would not be the ideal place to go. For instance, Bank of America’s 10-year CD rate is currently 1.00% APY. A 5-year CD from most online banks, such as CIT Bank or Discover Bank, will offer a higher return.