What drives CD interest rates? In the bigger picture, 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 will often 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, more "street-level" factors will affect CD interest rates as well. Banks with lower overhead costs — online banks such as Ally Bank, for example - can often offer higher rates than our traditional counterparts with physical branches.
And your choice of term also affects CD interest rates. The longer term you choose, the higher CD interest rate you will typically 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 what is to stop you from selecting the longest term available to earn the highest CD interest rate? First, you may not want to tie up your money for years. Secondly, you may be concerned that interest rates will rise in the future, making you reluctant to commit your funds for a long term. Fortunately, there are solutions for these dilemmas.
Enjoy Potentially Higher Rates and Flexibility with a Raise Your Rate CD.
You can enjoy the rates that come with two-year or four-year CDs and still have the option to get an even better rate if one becomes available — with an Ally Bank Raise Your Rate CD. Our Raise Your Rate CDs give you the option of increasing your rate once (for a 2-year CD) or twice (for a 4-year CD) if our rates on these CDs go up during the term of your CD.
Enjoy the Best of Both Worlds With 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. The solution is CD laddering.
With a CD ladder, you build a portfolio of CDs with staggered maturity dates. You can start with range of short- and long-term CDs. Then, as your short-term CDs begin to mature, you can use that money toward expenses or simply roll them over into potentially higher-yielding longer-term CDs. Once you get your ladder set up, you'll find that you always have a portion of your money maturing and available for your use on a regular basis.
Another option when flexibility and access to your money is a concern is our 11-month No Penalty CD. With it, you always have the option of withdrawing your entire balance — including any interest you've earned — anytime after the first six days after funding your CD.
Many outside factors drive CD interest rates. But you can make choices to make sure you find the right rates and right strategy to suit your savings goals. Visit Allybank.com to learn more, or talk with a knowledgeable Ally Bank Customer Care Associate anytime, 24/7 at 877-247-ALLY (2559).