Know which CD is right for you

Man standing atop steps formed from dollar bill

Certificates of deposit have taken a beating lately. But that doesn't mean they aren't a good place to park your savings.

CDs, which carry FDIC protection like savings and checking accounts, offer one distinct advantage: higher rates.

The catch is that your money is locked up. If you need your deposit back before the maturity date, you have to pay a penalty. Or you can get stuck with low rates if interest rates increase.

It helps if you can build a ladder, choosing both short and long terms.

But not everyone has the savings to buy enough certificates to fill out a ladder. Other savers just like the simplicity of only owning one or two.

Either way, you should be careful before picking your terms.

If you pick a term that is too long, you might miss out when rates increase. If you go too short, you might have to settle for a lower rate.

The key is to pick terms that maximize income over the long term.

So how exactly do you pick out the best term?

First, it's important to do a quick primer on the different type of CDs that are available.

Fixed rate

This is the plain vanilla version of a certificate of deposit. The bank will give you one rate and it never changes. Most of the rates you'll find in our database are for fixed-rate CDs.

A fixed-rate certificate should always be your starting point when comparing rates.

Variable rate

A variable-rate CD ties the interest rate to a benchmark. This means you earn more or less interest as the benchmark changes.

The most common benchmarks used by banks for their variable-rate certificates are Treasury yields, and the current prime rate. Typically, rates on a variable-rate CD will reset quarterly based on underlying changes from a benchmark.

This means that your rate increase could actually lag interest rates in general.

Take a look at an offer from, the online operation for Charlotte-based NewDominion Bank. It has variable-rate CDs with terms ranging from one year to 30 months. But the current 30-month variable rate pays just 0.45% APY.

Interest rates would have to increase very rapidly for an investor to come out ahead if you compare it to buying the highest fixed-rate 30-month certificates in our database, which pay more than three times what NewDominion is offering.

Step-up (no investor option)

A certificate that pays progressively higher interest rates on a pre-determined schedule is called a step-up CD.

The rates on a step-up CD will usually start below the most competitive rates, but increase over time. You can compare the return with that of a traditional certificate with the help of laddering calculator.

For example, TD Bank offers a 3-year step-up certificate that pays 0.75% APY in the first year, 1.00% in the second and 1.39% in the third. The compounded average of those three rates, which comes to 1.05%, is well below the best 3-year rates that are available today.

In this case, it would make more sense to stick with a high yielding 36-month certificate.

Bump-up/step-up (investor option)

An entirely different type of step-up CD allows investors to change the rate on at their discretion.

These certificates, also called bump-up CDs, act a little bit like a do-over for a saver. You have the option, usually a one-time option, to bump-up your rate to the prevailing rate for the term that you picked.

If interest rates increase, you will definitely want to use your option to grab a higher rate. On the other hand, if rates go down you will want to keep the original rate.

Ally Bank offers a bump-up CD it calls the Raise Your Rate Certificate of Deposit. It is a 2-year certificate paying 1.49% APY with a one-time bump option.

An important thing to remember is that your benefit of grabbing a higher rate is still tied to how generous the issuing bank is with its rates. What if rates are increasing all over the country, but your bank is standing pat?

Now that you have a pretty good handle on the different types of certificates, it’s time to look at some practical advice on how you should pick your term.

Tip 1. Know your needs.

Think carefully about how sure you are that you will not need to tap into your savings before locking-in on a longer term. If you have foreseeable expenses in the future or are risk-averse, sometimes it is better to pass on the absolute highest rate. Evaluate your cash needs carefully.

Tip 2. Do the math.

Don't pick a term without using a CD rates calculator. Run a couple of scenarios to compare your return between rolling over short-term certificates versus investing in longer terms.

Then compare the fixed rates against the various variable, step-up and bump-up offers. Which offer will make you the most money?

Remember, it’s harder than you think to make these judgments in your head. And of course the calculator doesn’t lie.

Tip 3. Check the rate forecast.

A big part of your decision-making for finding the right term should be to consider the forecast for interest rates. Are rates heading up? And if so, when? You may have a hunch on where rates are going, but it’s always advisable to get some more expert input.

You can find detailed charts of interest rate forecasts at

Now you’re ready to find that perfect certificate. Almost.

Our 5 smart moves to make the most from your CDs tells you how to choose the right bank for your certificates of deposit.

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