Certificates of deposit (CDs) are safe places to keep money and earn interest. But what drives bank CD rates -- why do they go up and down, and why do some banks offer more than others?
Two Main Factors
There are two main factors that affect bank CD rates. They are:
- The length of time until the CD matures, and
- The current interest rate environment
Length of time: the longer you'll have your money tied up, the higher your rate will be. Check around, you'll find that rates increase as the length of time increases (for example, an 18 month CD will pay more than a 6 month CD). This is because the longer you commit to leaving your money on deposit, the more flexibility the bank has with your money. They are willing to pay you a better rate because they can use the money for a wider variety of purposes (and presumably they can earn more as well). Of course, there are surprising exceptions to this rule in uncertain times.
Rates in the economy: current interest rates are also an important factor. That is, if rates in general happen to be high (or rising), bank CD rates will also be high (or rising). High rates don't just apply to CDs -- they also apply to loans that the bank is making with your money. They'll charge borrowers a higher rate, and they can afford to pass more along to you.
Banks know that you have plenty of choices. If rates in general are high, somebody will be willing to pay you a decent rate on CD deposits (because they can earn more than that by investing or lending the money). As a result, you can expect to see CD rates move more or less with other interest rates.
Other factors can influence bank CD rates. For example, you may find that a bank is trying to win some short-term business by offering slightly higher rates. They know that there are people out there shopping for great CD rates, and they hope that once they get a customer in the door the customer will stay (and bring over additional assets).
Another factor is the desired profitability. You may find that credit unions have rates that are slightly higher than bank CD rates. Because credit unions are nonprofits, they can afford to offer a little more to members at the expense of higher margins (banks might have to share their profits with investors or pay taxes on them).
Getting the Best Bank CD Rates
Here are a few suggestions that should help you get the best bank CD rates available: First, shop around. Start by checking your newspaper, mail, and banners on local institutions. Check DepositAccounts.com for local deals, and see our CD Interest Rate Scorecard for insight on what competitive institutions are up to.
Another idea is to check any credit unions that you may have a relationship with. Ask about any "specials" coming up. You'll often find a great deal.
Use the two main factors mentioned above to your advantage; if you really won't need the money for a while, lock it up for a longer term (within reason -- a bank CD rate may or may not be the best option if your time horizon is greater than 5 years or so). Also, see what interest rates are doing. If you think they're headed up, you may benefit by using a shorter term because bank CD rates will be more attractive in the future. Of course, it is very hard to predict interest rates and markets -- so don't knock yourself out trying to time it just right.
- For details on how to set things up, see CD Investing Strategies
Finally, buy in bulk. If you want to get the best rates, sometimes you have to meet certain minimums. If you have your assets spread out at various institutions, you may be missing out on "preferred customer" rates. Find out if there is any advantage to consolidating your assets at a given institution.
To read more about finding the best CD rates, check out the CD Basics page.