CD Rates
5 smart moves for buying CDs with interest rates at record lows
Savers need a savvy strategy for buying CDs after the Federal Reserve's shocking decision to hold interest rates at record lows at least through mid-2013.
With CD rates already at all-time lows, there's never been a worse time to buy certificates of deposit.
But with a struggling economy and the European debt crisis constantly roiling the stock and bond markets, there's a lot to be said for keeping at least some of your money in an investment where the principal is absolutely safe.
That's why we've come up with 5 smart moves to help savers make the most of a tough situation.
Smart move 1. Go long with the highest interest rate you can find.
Two more years of the Fed's current policy sounds ominous enough on its own.
But even when it finally starts allowing rates to rise, it will probably do so in quarter- or perhaps half-point increments that will require time to boost the average return on a 1-year CD that's below 0.4% to a more reasonable 3%.
That's why you need to lock in the highest interest rate you can find on long-term CDs, as soon as possible.
Doing this ensures your savings will earn as much as possible while you wait out the Fed.
Don't be timid. You should go “all-in” on long-term CD rates while they still offer a modest premium over short-term rates.
Expect to hold those CDs as long as it takes until the returns on shorter-term CDs finally catch up and start offering better returns.
Then you can cash in your holdings early and move your money to the higher rates on shorter-term CDs.
Redeeming a CD before it matures almost always involves paying an early withdrawal penalty.
But you can minimize that cost by putting your money in a bank with relatively lenient charges -- typically six to nine months' worth of interest.
Let's say, for example, that you invested $10,000 in a 10-year CD that pays 2.5% APY with a 9-month withdrawal penalty.
If you held onto it for four years, you'd have earned $1,051 in interest, lose $205 in penalties and ultimately walk away with $846.
That means you would have earned an effective interest rate of just over 2.0% APY once the early withdrawal penalty is taken into account -- or more than you could earn with any 12-, 24-, or even 36-month CD right now.
Smart move 2. Substitute top-paying savings and money market accounts for short-term CDs.
Everyone needs to keep some short-term savings available for emergencies.
One of the current oddities of the deposit market is that some banks are paying more on savings and money market accounts than you can earn with 3-, 6- or even 12-month CDs.
Watch our "Tips & Deals" section for updates on the best nationally available savings and money market accounts, and check your newspaper and bank signs for local deals on those kinds of deposits.
You should consider any money market account that pays 0.75% or more to be a good alternative to short-term CDs.
Smart move 3. Know when to stop looking.
Moving money between banks that all pay less than 1% on their CDs just isn't worth the hassle.
That's especially true if you have $5,000 or less to invest.
Choosing between certificates of deposit that pay 0.25% or 0.40% or even 0.80% is no choice at all.
You'll earn very little no matter where you go, and the difference between what you'll earn in interest is just a few dollars a year.
You can see this for yourself.
Our CD calculator will show you how much -- or how little -- you stand to make with any given interest rate.
For many savers, convenience should trump return.
Buy your CDs at the corner bank where you have your checking or savings account until the Fed allows interest rates to start going up.
Smart move 4. Take full advantage of local credit unions.
You can often find higher deposit rates at credit unions than at banks.
It doesn't make sense to shop around for the best returns without including your local credit unions in that search.
Although membership used to be strictly limited to employees of a certain company or trade, those rules have been changed so more savers can join.
Use CULookup.com for a list of the credit unions you’re eligible to join.
Then check the CD rates on their websites to see if they’re high enough to take the plunge.
Smart move 5. Avoid troubled banks.
Banks on the verge of failure often offer higher-than-average returns in a last-ditch effort to attract more deposits.
The bank hopes the money can be invested or loaned to generate the profits it needs to cover losses on all the bad investments and loans that are pushing it toward insolvency.
If that effort fails and government regulators seize the bank, your federally insured deposits are safe. You'll get to keep all of the interest you've earned up to that point.
But regulators will sell the bank to new owners who are not obligated to honor the CD rates you were promised by the failed bank. Indeed, new owners routinely cut returns on the customers of failed institutions.
That means you should avoid banks with the most problematic balance sheets and the highest chance of failure.
The easiest way to find those troubled banks is to search our database of the best CD rates from scores of banks.
Under each name you'll see one to five stars, which is how that bank scores in the “Safe & Sound” rating system, which employs more than 20 tests to measure the capital, asset quality, profitability and liquidity of each bank.
The more stars, the more solid the bank’s financial condition.
Think long and hard before buying CDs at banks with just one star.
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