(Updated: Jan. 23, 2015)
Since the recession, we’ve been stuck earning low rates on certificates of deposit (CDs). It’ll be nice to see higher interest rates finally. Talks of an upcoming interest rate hike have become more common after the turn of the new year, and it’s very likely to come during the summer. Find out how you can prepare for it and maximize the interest earned on your savings.
Following the last meeting of the Federal Reserve, our central bank, there were positive signs that interest rates were going to rise in 2015. The majority of central bankers believed that an interest rate hike was happening this year. To everyday savers, it means more earnings from deposits accounts like savings accounts, money market accounts and CDs.
Let’s focus on CDs here because timing affects your interest earnings during a period when interest rates are rising. The tricky part with CDs is that the interest rate is locked in for a specified time — usually ranging from 6 months to 5 years.
In the last six months, CD rates have climbed slightly. The table below shows the changes in national CD rates averages from June 30, 2014 to Jan. 15, 2015. The figures are based on the data acquired from banks that are tracked by MyBankTracker.
|CD Term||APY (as of 6/30/14)||APY (as of 1/15/15)||APY Change|
The small increases in CD rates is expected because banks also know that a rate hike is coming too. They’re upping rates in anticipation of that and they’re attracting deposits at the same time.
However, you should be careful with CDs right now.
If you commit funds to a CD before rates increase, you’re stuck with below-market rates until the CD ends. On the other hand, your money isn’t really growing if you just hold onto it as you wait for higher rates to arrive.
Fortunately, there are two easy ways that you can ensure that you are still earning a decent interest rate as you get ready for a rate hike:
1. Use an online savings account for now. While you’re waiting for interest rates to rise, keep your cash in an online savings account that carries exceptional rates. GE Capital Bank (1.05% APY) and Ally Bank (0.99% APY) are just a couple of great online banks with top-of-the-line savings accounts. Keep your money here until you’re ready to move into CDs.
2. Open “bump-up” CDs. Instead of regular CDs, you can put money into bump-up CDs that allow you to increase the rate on the CD, after you’ve already opened it. For instance, if a 2-year CD originally paid 1.50% APY, but the rate rose to 1.75% APY after one year, you can request that the rate be increased to 1.75% APY for the remaining year. That way, you won’t miss out on rising rates. Currently, CIT Bank and Ally Bank are two popular online banks that offer these bump-up CDs.
(Updated: July 3, 2014)
In June, the rates on certificates of deposit (CDs) took a turn for the worse as the national averages show negative movement. Major rate cuts from some online banks contributed to the noticeable dip. But, we do not believe that this is the beginning of a new rate trend.
During the past month, the national average of CD rates of terms from 12 months to 5 years fell. These are the first instances of rate drops for this year.
The most notable rate changes come from Bank of America, which slashed its entire line of already-dismal CD rates to even lower levels. For example, Bank of America’s 60-month CD rate fell from 0.20% APY to 0.15% APY.
Usually, when one of the nation’s largest banks are dropping their rates, it’s a sign that rates at other banks will fall too. The rate cuts at Bank of America go against the general trend of rising CD rates in recent months. It may be that the bank isn’t focused on attracting CD deposits at the moment — not that its CD rates were too attractive to begin with.
Other banks that have decreased CD rates include Virtual Bank, iGObanking.com and GiantBank.com, which played roles in the decline in national averages. For instance, iGObanking.com’s 2-year CD rate of 1.15% APY fell to 0.35% APY. And Virtual Banking dropped its 5-year CD rate from 2.28% APY to 2.01% APY.
Not surprisingly, you’ll notice that the biggest changes in the national averages occurred to those two CD maturity terms.
The table below shows the changes in national CD rates average from May 31, 2014 to June 30, 2014. The figures are based on the data acquired from banks that are tracked by MyBankTracker.
|CD Term||APY (as of 5/31/14)||APY (as of 6/30/14)||APY Change|
We don’t think that the rate drops will stay consistent in the coming months because the Federal Reserve continues to relieve pressure on rates while it also prepares to raise the federal funds rate once the economic conditions justify the change in monetary policy. It’s very likely that CD rates will rebound next month.
CIT Bank’s new line of bump-up CDs
In June, CIT Bank revamped its line of bump-up CDs. The online bank replaced its Achiever CDs with the new RampUp Plus CDs. Like the former 1- and 2-year Achiever CDs, the RampUp Plus CDs allow a one-time rate increase and a one-time deposit increase. Additionally, CIT Bank added new 3- and 4-year RampUp CDs, which do not come with the deposit increase (the one-time rate increase remains available).
Given the likelihood of a Fed rate hike in the next year or so, bump-up CDs appear attractive because they offer the opportunity to raise the rate when you’ve already committed your money to the CDs. Others may be refraining from CDs to avoid a situation where their money is locked at a lower interest rate when rates begin to rise.
The RampUp CDs from CIT Bank are worth your consideration if you’d like a rate of return that is higher than an online savings account, but fear the rate risk. Their rates are also more competitive than the comparable Raise Your Rate CDs from Ally Bank. However, the caveat is the high minimum opening deposit required for CIT Bank’s CDs (at least $25,000) as opposed to the $0 minimums for Ally’s CDs.
Currently, long-term CDs remain reasonable savings vehicles for those who are comfortable not touching their money for a long time and do not mind the possibility that they’d be earning lower rates (if rates rise).
The top nationwide 5-year CD rate is offered by Everbank at 2.30% APY on a $1,500 minimum opening deposit. Synchrony Bank, formerly GE Capital Retail Bank, offers the same 5-year CD rate only on balances of $25,000 and up.
Meanwhile, short-term CDs struggle to look good when pitted against the top savings accounts. You’d have to consider if the cash commitment is worth the small interest advantage over an online saving accounts. Currently, the top nationwide savings rate is available through SFGI Direct at 1.01% APY ($1 minimum balance).
The best nationwide 1-year CD rate is also offered by EverBank at 1.10% APY ($1,500 minimum to open).
When the difference between the rates are so small, you’re better off with the liquidity of the savings account — so that the money is readily available to be invested elsewhere when the opportunity presents itself.
One way to address interest-rate risk is to build a CD ladder. This technique enables you to earn competitive rates every year without losing too much access to your cash. CDs are opened and renewed in a staggered format so that they mature on a yearly basis — you can choose to reinvest the money in a CD or opt to use the money if you need to do so.
In any case, consider the minimum opening deposit requirements — if you have more money to put in a CD, you may be eligible for a higher CD rate.
Check out the top CD rates rates currently available: