Much of what you can earn on a Certificate of Deposit (CD) is based on factors out of your direct control. First, a traditional yield curve dictates that longer-term investments demand higher returns, so the longer you can lock away your cash in a CD, the more interest a bank is willing to pay. In addition, economic policies enacted by the government, as well as the overall economic environment, will affect the rates you can earn on deposits.
Currently, these forces are making it difficult for savers to find rates anywhere near those they came to expect in past decades. When even most five-year CDs offer interest rates of less than 2 percent, you’ll be struggling to pursue every bit of extra yield possible. Here are three relatively simple ways to make the most of your savings through the best CD rates.
1. Seek promotional rates. The inverse relationship between liquidity and yield, as well as the current economic climate, are out of your control. However, there is a third factor influencing CD rates. The individual pricing strategy that a bank pursues can be partially reflected through the use of promotional rates for certain CD terms. Market Rates Insight, a financial market data firm, explains that CD rate premiums—the difference between regular and special CD rates—are used to “drive balances towards the most desired deposit products” and are an “indication of the capital strategy” of each bank. As a result, consumers can potentially encounter promotional rates that go above and beyond the typical offerings.
Analysis of MRI’s CD pricing data over the past year revealed that banks could offer up to 0.68 percent of additional interest (expressed as an annual percentage yield) over the regular average APY. A bonus rate could even double your return. The average promotional APY for a 3-year CD was 1.38 percent—nearly twice the regular average.
Furthermore, a promotional rate for a short-term CD could mean a higher return for half the time to maturity. Three- to nine-month CD specials offered an average APY of 0.49 percent, according to the same data. At that rate, your yield would be higher than even the typical promotional APY for a one-year CD (0.33 percent) and nearly equal to the regular average rate for a two-year CD as well (0.51 percent). This is a critical advantage for savers who cannot risk tying up their money for a long period of time. It also allows you to more quickly take advantage of any rate increases that may occur over the deposit term.
2. Try a local credit union. Credit unions—not-for-profit institutions that serve members instead of customers—must by definition pass on their earnings to members in the form of services and products. Therefore, they tend to offer better rates on savings and CD accounts (sometimes called share certificates) than banks. A Nerd Wallet study of deposit accounts with interest rates above current inflation revealed that about 80 percent of these accounts were offered by credit unions. Credit unions have eligibility requirements that you must meet to become a member, but it’s usually not difficult to find a credit union that you can join based on the location of your home, employer, school, or church.
3. Move your money online. Internet-only or online banks are a favorite among savers who simply want to get the best rate they can find at an institution anyone can join. Many offer checking accounts, savings accounts, CDs, and other products accessible through a website. They typically have lower fees and pay higher interest rates on savings balances; however, you won’t be able to walk in to a branch for assistance. Transactions and customer service take place online or over the phone. Most well-known online banks are reputable; they are often part of larger, more traditional financial institutions (such as Discover Bank). Just be sure that the bank is FDIC-insured before making a deposit.
The bottom line: The key theme of these three points is that, in order to get the best offer, you must do your homework. Don’t settle for the accounts offered at the big banks just because of their name brand, and don’t assume that the best deals are down the street. You may find higher rates across the country or even online.
John Gower is an analyst at NerdWallet, a website dedicated to helping consumers save money on checking accounts, credit cards and more.