If you'd like to build your savings and don't mind having your money locked up to earn a higher interest rate than a typical savings account, a certificate of deposit (CD) could be for you. CD rates are currently at their highest compared to recent years, with many yielding over 5% annual percentage yields (APYs).
CD rates are influenced by factors like term length (longer terms usually offer higher rates), deposit amount (some CDs offer tiered rates), Federal Reserve interest rates, and promotional offers from financial institutions.
Interest rates on CDs have surged since 2022, closely following the lead of Fed interest rate hikes. The national average rate for 5-year CDs stands at 1.86%, a significant increase from less than 0.50% in June 2022. Many banks are offering even higher rates, with the top 5-year CDs boasting APYs exceeding 4%, and some 1-year CDs offering APYs well above 5%.
Initially, CD rates climbed in response to the Fed's measures to combat inflation. However, with inflation easing from over 9% in mid-2022 to 3% currently, the Fed has maintained interest rates steady at 5.25% to 5.5% since July 2023. Nonetheless, there remains a possibility of a rate cut later this year.
Given recent increases in interest rates, investing in a CD now could yield higher returns. However, fluctuations in the federal funds rate influence CD APYs, potentially causing rates to decrease if the Fed lowers rates as they've hinted at doing later in the year.
CD rates are currently at their peak compared to recent years, reflecting favorable market conditions. So, if you're considering putting money away into a CD, now could be the right time.
Currently, you have the opportunity to secure advantageous rates on both short-term and long-term CDs. By depositing a larger lump sum into your CD, you can earn substantial interest.
In the early 1980s, CD rates reached double digits -- a stark contrast to today's rates. But by 2019, the APY for a 5-year CD hovered slightly above 3%.
Throughout the early 2020s, top rates generally remained below 1% APY. In recent times, we experienced a period of increasing rates, with the best offerings exceeding 5% APY for 1-year CDs.
Determining a good CD rate is subjective, balancing the highest rate with your ability to keep funds locked for the term. For instance, a 5% APY CD over five years might not be the right choice if you need liquidity sooner or if rates rise, leaving you with a lower return. Generally, rates above the national average are advantageous. Compare rates across banks for your desired term to find the best option.
Key factors to evaluate when comparing CDs include minimum balance requirements, available terms, offered interest rates (typically higher at online banks), penalties for early withdrawals, and any associated fees. Opting for a bank rather than a broker might help avoid unnecessary fees. Consider these factors:
Online banks and fintechs typically offer better rates than national banks. Large financial institutions primarily generate revenue through interest earned on loans, fees, and investments in securities.
In contrast, smaller banks and online fintech companies actively attract new customers by offering competitive APYs on deposit accounts. Moreover, online banks typically have lower overhead costs, allowing them to pass on better rates to their clientele.
CD ladders suit savers hesitant to lock funds for long terms. Splitting savings across CDs with varying maturities offers a blend of short-term access and higher long-term rates.
For example, if you begin by investing $3,000 in three staggered CDs (1-year, 2-year, and 3-year), then as each matures you reinvest the money in a 3-year CD. With this plan, you get access to your money (plus the interest you've earned) every year.
Right now, CD rates are high whether you're looking for a shorter or longer term length. While APYs aren't the only factor to consider when determining which institution to go with to open your CD, knowing the absolute highest rates available today can help you make a final decision.
Compare rates to top national banks
If you're unfamiliar with most of the names mentioned above, there's a straightforward reason why. CDs typically don't yield substantial income for major financial institutions by themselves.
Established banks like Chase, PNC, and U.S. Bank prioritize attracting customers through more profitable products like loans and credit cards, rather than CDs. Consequently, the interest rates offered on CDs at these banks are often much lower compared to those available at smaller regional banks or online institutions and to get a good rate, you may be required to open other deposit accounts or deposit much higher minimums.
A certificate of deposit is a specialized savings account where you earn interest by depositing money for a predetermined length of time. Unlike traditional savings accounts, with interest rates that fluctuate with market conditions, a CD offers a fixed interest rate for the entire term. This stability allows savers to benefit from higher returns, particularly in periods of elevated interest rates set by the Fed.
When your CD reaches maturity, you gain access to both your initial deposit and the accrued interest. One notable distinction between a CD and a standard savings account is that funds deposited in a CD are inaccessible for withdrawal until the term concludes -- if you do need to take the money out early, you're going to pay an early withdrawal fee.
Various CD types cater to different needs, such as:
Currently, CD rates are elevated across various term lengths, whether short or long. While APYs are a crucial component, they're not the sole determinant in choosing where to open your CD. However, knowing the highest available rates can assist you in making a well-informed decision.