What drives certificate of deposit (CD) interest rates?
CD interest rates are influenced by the general interest rate environment. The Federal Reserve sets the rate at which banks borrow from each other (the short-term interest rate) which in turn affects the rates passed along to businesses and consumers. When the economy is booming, the Federal Reserve often will raise rates to keep growth and inflation manageable. When the economy is slowing, the Federal Reserve will lower rates to make it less expensive to borrow money, which tends to spark growth.
Other factors affect CD interest rates as well. Banks with lower overhead costs—online banks such as Ally Bank, for example—often can offer higher rates than traditional banks with physical branches. Term lengths also affect CD interest rates. The longer term you choose, the higher CD interest rate you typically will earn. In exchange, you usually must agree to pay an early withdrawal penalty if you withdraw your money before the CD's maturity date.
So, why not just choose the longest term at the highest rate? While that may be the best option for you, there are other things to consider. First, you may need access to your money before the selected term is up. Second, you may be concerned that interest rates will rise in the future, making you reluctant to commit your funds to a given rate for a long term. Take a look at the following solutions Ally Bank has to offer.
No Penalty CD. This CD allows you to withdraw all your money, including interest earned, without any penalty, any time after the first six days following the date you fund your account.
Raise Your Rate CDs. With these CDs, you have the option of a one-time rate increase if our 2-Year CD rate goes up; you have the option to increase your rate twice (two times) if our 4-Year CD rate goes up.
Consider CD Laddering.
It is possible to enjoy the interest rate of a long-term CD, but still maintain a degree of flexibility and accessibility to your money. A CD ladder is a system that diversifies your money across CDs with varying maturity dates. For example, you might put 20 percent of your funds in five different CDs, each of which would have a different term length. If you chose CDs with term lengths of 12 months, two years, three years, four years and five years, for example, once the 12-month CD matured, you could then renew it in a new five-year CD. Following this process every year would result in a CD maturing every year, allowing you to take advantage of potentially higher long-term rates.
Many outside factors drive CD interest rates. But you can make smart choices to ensure you’re getting the best rates with the right strategy for your financial goals. Learn more by visiting Allybank.com or call live, 24/7 customer care at 877-247-ALLY (2559) today.
Ally Bank, Member FDIC