Home Interest rate New bank CDs pay more than double the interest rate of some old ones | Company

New bank CDs pay more than double the interest rate of some old ones | Company


A bank certificate of deposit is traditionally a good way to get a little more interest on your savings, in exchange for leaving that money tied up for a while.

A CD can usually be paid off sooner, with a penalty of forfeiting the last few months of interest earned, so putting money in a 2-year-old CD doesn’t really mean the money is out of reach for two year.

Lately, with rising interest rates, rates for CDs and regular savings accounts have nearly doubled since the start of this year.

Nobody gets rich with these rates – we’re talking about an interest rate between 2% and 3% – and they’re well behind the rate of inflation, but the changes taking place raise some issues.

For example, when does it make sense to pay a penalty and close a CD early in order to put that same money into a higher yielding CD?

Consider how the rates have changed. Here is an overview of the evolution of the rates offered by Ally, one of the large online banks, for 18-month CDs:

  • February 2021: 0.6% interest.
  • April 2022: 1.25%
  • May 2022: 1.75%
  • July 2022: 2.25%

Today, Ally pays 1.25% on regular savings accounts, so a CD acquired last year would look like a real loser. I’m using Ally as an example because I have an account with them and know their rates and policies, but always shop around and also check local banks for the best rates.

Regular readers may recall that in February 2021 I wrote about Escalating Rate CDs, which allow account holders to upgrade to presumably higher rates offered at any time during the term of their CD, usually once or twice depending on duration.

In retrospect, it was a good idea at the time.

But what if a person put money in a CD just a few months ago when the interest rate was 1.25% and now it’s almost double that?

The penalty for early withdrawal of CDs, at least at Ally, is 60 days interest, and someone who released a CD in April would have about three months.

Let’s say it’s a $10,000 CD. At 2.25% versus 1.25%, that’s about $100 more in annual interest. So yes, it would pay to cash in that CD and put the money into a new one paying almost twice as much.

And if you think interest rates will continue to rise, then an increasing rate CD might again be a good choice. With one of these, you can upgrade to a higher rate when offered without the early withdrawal penalty.

Now, none of these CD rates will make anyone rich. Heck, they won’t even keep up with rising prices, especially in today’s high inflation environment. But ideally, people have some emergency savings tucked away, and it’s good to earn as much interest as possible.

US inflation-linked savings bonds are a good option for long-term savers

In April, I wrote about Federal Inflation-Linked i-Bonds, US government bonds that currently offer a 6-month guaranteed interest rate of 9.62% on treasurydirect.gov. It’s a great, safe way to save, but there’s an annual limit ($10,000) on how much a person can buy, and you can’t withdraw the money until a year has passed. elapsed.

For emergency savings that you don’t think you’ll need for at least a year, i-bonds remain my top recommendation. After that, check current CD rates and consider an increasing rate CD. With emergency funds in a CD, you can always withdraw them if needed and lose just a little interest.

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Reach David Slade at 843-937-5552. Follow him on Twitter @DSladeNews.