Certificate of deposit (CD) rates have climbed to multi-year highs as banks compete for deposits in a higher interest-rate environment.
Savers can now earn significantly more on CDs than they could just a few years ago, but rates vary widely among financial institutions.
Before opening a CD, consumers should compare yields, evaluate term lengths, and understand early withdrawal penalties.
It’s been a while since certificates of deposit have been newsworthy. For nearly two decades, the interest paid on CDs has been practically nil.
But after years of historically low returns, CDs are once again attracting attention from savers. Higher interest rates on U.S. Treasury bonds have prompted banks and credit unions to boost CD yields, allowing consumers to earn substantially more on their savings while avoiding the volatility of the stock market.
While the Federal Reserve's aggressive interest rate hikes over the past several years started to lift rates, the spike in Treasury yields in recent weeks has also contributed to the rise. As savers began to actively look at CDs again, banks have found themselves competing more aggressively for deposits, resulting in even higher yields on savings products, including CDs.
A search of the internet shows some six to 12-month CDs are paying an interest rate of between 4.23% and 4.5%.
What’s attractive about CDs
For consumers seeking a safe place to park cash, CDs can provide a guaranteed return for a fixed period. Unlike stocks and mutual funds, CD principal is generally protected by federal deposit insurance when held at insured banks and credit unions within applicable limits.
However, financial advisors say savers should look beyond the advertised annual percentage yield (APY) when selecting a CD.
Compare rates across institutions
One of the biggest mistakes consumers make is accepting the first CD offer from their primary bank. Online banks and credit unions frequently offer higher yields than traditional brick-and-mortar institutions. A difference of even half a percentage point can translate into meaningful additional earnings over time.
Choose the right term length
CDs are available in a variety of terms, ranging from a few months to five years or longer. Longer-term CDs often offer higher yields, but that isn't always the case. In some market environments, shorter-term CDs may provide comparable or even better returns.
Consumers should consider when they may need access to their money before committing to a specific term.
Understand withdrawal penalties
A key feature of CDs is that depositors agree to leave their money untouched for a predetermined period. Withdrawing funds early typically triggers a penalty that can reduce or even eliminate some of the interest earned.
Before opening a CD, consumers should review the institution's early withdrawal policy and ensure the funds won't be needed before maturity.
Consider laddering strategies
Some savers use a strategy known as CD laddering, which involves dividing money among multiple CDs with different maturity dates. This approach can provide periodic access to funds while allowing savers to take advantage of competitive rates across various terms.
A ladder can also reduce the risk of locking all savings into a single rate if interest rates continue to change.
Look beyond the headline yield
The highest advertised rate is not always the best choice. Savers should verify that the institution is federally insured, review minimum deposit requirements, and evaluate account features and customer service.
With CD rates remaining attractive compared with recent years, consumers willing to shop around and carefully evaluate their options may find an opportunity to earn more on their savings while maintaining a relatively low level of risk.