Here’s Why Banks Are Finally Raising Rates on CDs

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Competition has driven banks to increase rates. 

A certificate of deposit (better known as a CD) is a type of bank account that offers you the chance to earn a decent interest rate on your money in exchange for locking it in place for a period of time (often ranging from six months to several years). Right now, the best CD rates are over 4%, which is a startling development. Just a few years ago, at the start of the COVID-19 pandemic, rates were well under 1%. How do we account for this change, and how do you choose the right CD for your money? Let’s find out.

Higher rates on CDs attract more customers

Consumers have a lot of good options right now when it comes to growing their money. You might consider Treasury bills, I bonds, or even a good old high-yield savings account, and you’ll see a much more generous return than savers have gotten in years. The variety of choices available has meant that commercial bank deposits fell in 2022 for the first time since 1948, according to FDIC data.

This is a serious problem for banks, which are bracing for an economic slowdown. Smaller banks may be in real trouble, as a lack of deposits can impact their profitability. So it stands to reason that in order to get more money through the door, so to speak, banks are improving their APY offerings to attract customers. And CDs in particular can be a great boon for banks. This is because when you open a CD account, you’re agreeing to leave it in place for a set period.

How can you take advantage of higher CD rates?

A CD can be a great place for money you need in the next few years, but not immediately. If you leave it in your checking account, it likely won’t earn interest, and if you want to avoid the possible temptation to spend it, the penalty you’ll incur for withdrawing early from a CD account will likely give you pause. It will typically amount to one or more month’s worth of interest earned on your money. And if you decide to withdraw early, you have to take all of the money out — you can’t leave part of it behind to keep earning interest. Depending on how much you have in the account, that loss of interest could be a significant amount of money.

Consider your timeline when looking to open a CD. If you’ve got a chunk of money saved for a home purchase in, say, a year, check out rates for 12-month CDs. If you’d rather split up your cash into multiple CDs with varying maturity dates, you could build yourself a CD ladder. This is a good strategy for right now, when interest rates are rising and you will have money available at regular intervals to put back into new CDs (or use, if you need the cash).

Don’t lock your money up in a CD if you’ll need it sooner rather than later. A CD is not a good place for your emergency fund, for example. For money you need access to on the fly, a high-yield savings account is a better choice.

If you’ve never considered opening a CD before, now is a good time to think about them. It’s hard to say what developments are upcoming for the U.S. economy, and the banking industry in particular, but one silver lining of higher interest rates is better rates on CDs.

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