Why are Big Banks’ CD Rates so Pathetic?

Finding a decent rate of return requires some research.

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I’ve banked at Citibank for over 20 years. And while no banking relationship is perfect, they’ve been pretty good to me. So while doing some research to find the best CD rates, I was surprised to see just how low Citi’s CD rates were on both short and long term certificates of deposit. For example, on a 3-month CD, Citi currently offers an APY of just 0.20 percent to Virginia residents (rates at Citi vary slightly from state to state).

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In contrast, Ally Bank offers a 3-month CD with an APY of 0.64 percent. With long term CDs, the rate disparity gets even worse. On a 5-year certificate of deposit, Citi offers an APY of 1.25 percent. FNBO Direct, offers the same FDIC-insured CD with an APY of 2 percent. And on top of the better rates, neither Ally Bank nor FNBO Direct have a minimum deposit requirement. Citi requires an initial deposit of $2,500.

And just so you know I’m not picking on Citi, other big banks offer similarly low CD rates. On 60-month CDs, Bank of American currently offers an APY of 1.21 percent. You can almost beat that rate with an ING Direct savings account that doesn’t lock your money away for five years. And HSBC pays just 0.05 percent on a 3-month CD.

So why do big banks offer such paltry rates on CDs? Conventional wisdom is that online banks don’t have the expense of physical branches and pass along the cost savings to customers in the form of higher interest rates on CDs and deposit accounts. While this does provide part of the explanation, some truth to this explanation, it’s not the only driver of rates.

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The simple fact is that big banks don’t need your money. With rates at historic lows and the Fed printing money through qualitative easing and other programs, these large financial institutions have no need to attract capital with competitive rates on long-term CDs or other deposit accounts.

So if you are looking to maximize your returns on savings, an online bank will provide the best rates. And consider a money market or no-penalty CD over a traditional CD. You get access to your funds, and the rates on CDs are generally not worth tying up your money for an extended period of time.

DR is the founder of the popular personal finance blog, the Dough Roller and credit card review site, Credit Card Offers IQ.