CDs are surging in popularity, as the interest rates you can earn with them are getting better, too.
The Federal Reserve increased its target federal funds rate last week for the fourth time this year. The Fed’s last increase in June raised rates by 75 basis points, the largest single rate hike in nearly 30 years. And then the Fed followed by raising rates by the same amount again this month.
“Right on the heels of the massive June rate hike, the Fed raised rates an additional 75 basis points just one month later,” says Ayesha Selden, a certified financial planner and franchise owner of Ameriprise Financial Services Inc. in Philadelphia. “This tells us that the Fed is willing to take extremely aggressive measures to cool inflation.”
Ongoing federal rates hikes mean rates on certificates of deposit and other bank accounts are moving upward, too — continuing a trend we’ve seen over the past several months.
As a result of the Fed raising rates — and with more rate increases expected to come, according to the Federal Reserve — experts say rates on CDs will keep rising alongside. As a result, average CD rates are increasing across the board.
Here’s an overview of today’s average CD rates, what to know when comparing rates and terms, and how a CD can fit into your savings strategy.
What Is the Average CD Rate Right Now?
Average CD rates have been steadily rising since the Federal Reserve started raising rates earlier this year. Here’s a breakdown of today’s average one-, three-, and five-year CD rates:
How NextAdvisor Determines These Average Rates
We compare three different averages in our average CD rate analysis. First, we consider the national deposit rates from the Federal Deposit Insurance Corporation (FDIC). Second, we use Bankrate’s national index of deposit accounts, based on a weekly survey (like NextAdvisor, Bankrate is owned by Red Ventures). Finally, we calculate the current average rate of each bank on our list of best CD rates. Despite low national averages, you’ll find more rates aligned with the NextAdvisor average when comparing CD rates among different banks.
|CD Deposit Term||National Deposit Rate||Bankrate National Index||NextAdvisor Average APY|
Some banks offer much higher rates than these averages. If you’re looking for a CD today, here are a few of the top APYs by term available this week:
- Bread Savings (formerly Comenity Direct): 2.50%
- Synchrony Bank: 2.30%
- Live Oak Bank: 2.50%
- Bread Savings (formerly Comenity Direct): 3.25%
- Synchrony Bank: 2.80%
- Sallie Mae: 3.05%
- Bread Savings (formerly Comenity Direct): 3.35%
- Synchrony Bank: 3.25%
- Marcus by Goldman Sachs: 3.20%
Which Term Length Should I Choose for a CD Rate?
The CD term that’s best for you depends on your financial goals, says Cory Moore, certified financial planner and founder of Moore Financial Planning. You can choose CDs with terms varying as widely as one month to five years. In today’s rising rate environment, some experts recommend shorter-term CDs.
“Longer maturity CDs do have a higher interest rate, but if you go for a longer maturity in the environment that we’re in, you could possibly be locked in at a lower rate,” says Sweta Bhargav, a certified financial planner and principal financial advisor for Adviso Wealth, a financial planning and investment firm in Philadelphia.
In other words, say you lock in a five-year CD at 3% today. As rates continue to rise, that same five-year CD may be paying a 5% APY in six months, but since your money is already locked in the CD with the lower rate, you may not be able to take advantage of the higher APY later on. On the other hand, when rates are dropping, locking in a long-term rate early can be a good strategy to withstand a low-rate environment.
With a one-year CD, for instance, you can still get a solid rate, but you’ll maintain more liquidity compared to locking your money away for years so you don’t miss out on a bigger return as rates continue to increase.
“If you are thinking about longer-term CDs because of the higher rates, look at CDs that are penalty-free or have smaller withdrawal penalties so you’re not losing too many months of interest,” says Bhargav.
This is a good strategy too if you’re thinking about building a CD ladder in a rising rate environment. With a CD ladder, can spread your deposit among several CDs with varying terms so you can maintain liquidity and take advantage of rising rates.
The return you earn on a CD today will depend on the term you choose. One-year CDs are a safe bet compared to longer terms. As the Federal Reserve continues to raise the federal funds rate, CD rates are also impacted, says Moore. Since rates are still rising, he recommends CD terms between 18 months and two years. Choosing a longer term may mean that you miss out on rising rates.
There’s also a risk in choosing a term that’s too short. If you’re considering a CD with a term of six months or less, it may not come with as much flexibility and liquidity compared to money market accounts and high-yield savings accounts, says Moore. These more liquid savings options may be better for avoiding a penalty from withdrawing from your CD before your term ends in case of emergency or other necessity on short notice.
CD Rates Compared by Term Length
With CD rates steadily increasing, one-, three-, and five-year CD terms offer the best CD rates compared to other savings avenues. Most rates range between 1.90% and 3.35%. The APYs listed below may vary by region. Here’s a look at the best CD rates by term length:
Best CD Rates for August 2022
|Bank||1 year apy||3 year apy||5 year apy||Minium Deposit|
|Bread Savings (formerly Comenity Direct)||3.00%||3.55%||3.65%||$1,500|
|Live Oak Bank||2.75%||2.50%||2.50%||$2500|
|Marcus by Goldman Sachs||2.40%||2.90%||3.25%||$500|
|American Express National Bank||2.25%||1.15%||3.00%||$0|
Note: The APYs (Annual Percentage Yield) shown are as of August 12, 2022. The APYs for some products may vary by region.
How to Open a CD
You can open a CD at most banks or financial institutions, in-person or online.
Start by choosing the CD type that best aligns with your financial goals, whether it’s traditional, IRA, no-penalty, or bump-up. Then, you should make sure the CD type offers the CD term you’re looking for, too. Usually, traditional CDs have more term options compared to other types.
Before you open the CD and lock in your money, also take time to look at the account details. This includes any minimum deposit, time to make the deposit, and any other perks, such as a limited-time rate increase guarantee or online tracking features.
Keep in mind that you typically can only make one deposit into your CD, so think about the amount you want to save and what you have available before you open your account.
When you’ve narrowed down your CD choice, you’re ready to open your account. You’ll need to provide some personal information, a form of ID, and any required funds to deposit. Check with your bank to see how you can make the deposit, such as a check, cash deposit, or transferring money from another account online.
Will CD rates go up?
Experts predict that CD rates will continue to go up as the Fed continues raising federal interest rates in its effort to control inflation.
What if rates go up while I have money deposited?
If you have a CD and interest rates increase, you’ll be locked into the rate that you agreed upon when you opened your CD. If you take your money out of your existing CD, you could face a penalty (usually equal to three months worth of interest earnings). If you’re worried about losing out on higher interest rates, you may want to consider a more liquid savings option, like a high-yield savings account.
What if I want to withdraw my money before the CD term ends?
If you have a no-penalty CD, you won’t pay a penalty if you need to take out money. But if you have a traditional CD, you’ll pay a penalty to withdraw before your CD matures. This penalty can vary depending on the financial institution you choose.