Certificate of Deposit (CD) Rates: Compare High CD Rates

One of the complaints that many people have about cash products, especially savings accounts, is that they have such low annual yields. In order to get better interest rates, some savers decide to use certificates of deposit (CDs). Because of the nature of CDs, it is possible to find better yields. However, you have to be prepared to make sure trade-offs – and remember that a CD is still a cash product and the yield will reflect that.

CDs: Time Deposit

A certificate of deposit is designated a time deposit. This means that it has a specific maturity, and during that time, it earns a steady interest rate. A certificate of deposit keeps the same interest rate throughout the term, so it is unaffected by rates as they go up and down. The rate set on the CD when you first open your CD account is determined by the Fed Funds Rate, and what the bank is willing to offer, on top of that rate, for an annual percentage yield.

For the most part, if you are willing to keep your money in the CD for a longer term, you can expect better interest rates. This is because the bank actually takes the money you put in, and lends it out to someone else. The longer your money remains in the CD, the longer it can be used (over and over again as borrowers repay their loans) to help the bank make money. As a result, a five year CD often yields better than a two year CD. Additionally, you can sometimes get a better rate if you are willing to put more money into the CD.

Downsides to CDs

Of course, part of the reason that you have better yields on CD accounts than on regular savings accounts is the fact that you do not have easy access to your money. If you withdraw from your certificate of deposit before the term is up, you will probably have to pay a penalty. This can reduce the value of your CD significantly in some cases. Once you put your money in a CD, you are essentially locking it away for a set period of time.

Another issue is that you can’t take advantage of the situation if interest rates rise. Because you are locked in to a specific term, you are also locked in to an interest rate. You lose out on interest earnings if the Fed decides to raise the Funds Rate. You can get around this to some degree by setting up a CD ladder. This provides you with the ability to take limited advantage of interest rate gains as CDs mature year after year.

Bottom Line

If you have a chunk of capital you are interested in preserving at a higher rate than what is offered by a savings account, you can consider a certificate of deposit. However, you should be aware of the limitations associated with CDs, and be prepared to leave your money in for the entire term of the CD.