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What to Know About CD Rates
Normally, certificates of deposits — known as CDs — have higher interest rates than savings accounts or money market accounts. But their rates recently dipped.
In response to the COVID-19 pandemic and the damage done to the economy, the Federal Reserve made an emergency cut to interest rates in March, and many banks and credit unions followed suit. Longer-term CDs typically have even higher rates, but the current economic climate has changed that too. For instance, the difference between returns on a one-year CD versus a five-year CD isn’t significant right now.
Whatever the rate environment, you should always shop around and compare offers when considering whether a CD makes sense for you. Once you lock in a rate, you’ll earn that until the CD matures.
Best CD Rates for October 2020
|Bank||1-Year APY||3-Year APY||5-Year APY||Minium Deposit|
|Comenity Direct Bank||0.60%||0.85%||0.90%||$1,500|
|Live Oak Bank||0.60%||0.70%||0.80%||$2,500|
|Goldman Sachs Bank USA||0.65%||0.65%||0.70%||$500|
|American Express National Bank||0.20%||0.45%||0.55%||$0|
Note: The APYs (Annual Percentage Yield) shown are as of October 20, 2020. The APYs for some products may vary by region.
This list does not represent the entire market. To rank the CD accounts you’re most likely to be considering, we began by analyzing the 26 most commonly reviewed and searched-for CD accounts. Then, we cut the list using the following criteria:
1. We eliminated credit unions and institutions with special membership requirements that make them inaccessible to a broad number of people. Many credit unions offer competitive terms for those who qualify; check your local area or use a credit union locator to compare rates.
2. We eliminated any institutions that don’t offer three of the most popular terms: one-year, three-year, and five-year. Many experts advise making use of various term lengths to maximize your CD investing.
3. We eliminated any institutions with minimum opening deposits of more than $2,500. While CDs are best for people with significant extra savings they can afford to hold in a long-term CD, there are many good options that don’t require high minimum deposits.
The table above is ranked by the 3-year APY rate. The APYs shown are accurate as of October 20, 2020. The NextAdvisor editorial team updates this information regularly, though it is possible APYs have changed since they were last updated. Also, some APYs may vary based on where you live.
Ally Bank is a popular online-only bank that offers products including home loans, high-yield savings accounts, CDs, and more. Without the overhead that comes with a national network of physical locations, Ally is able to offer better rates and fees. Ally Bank is ideal for people who value customer service (for which Ally has a good reputation) but don’t mind managing all their finances online. None of Ally’s bank accounts has minimum balance requirements.
American Express National Bank
Did you know American Express does more than credit cards? American Express started an online consumer bank arm in 1989. American Express National Bank primarily offers competitive savings accounts and CD rates with no monthly fees. It lacks a checking account option.
Barclays is a British multinational financial service company that’s organized into four core businesses: personal banking, corporate banking, wealth management, and investment management. Barclays Bank is the company’s personal banking business that offers high-yield savings accounts and CDs. It doesn’t offer any checking account options. Also, its U.S. banking operation doesn’t have a branch network, so you’ll only be able to manage your account online.
Capital One is one of the nation’s largest banks based on deposits. The Virginia-based bank was established in 1994 with all of its revenue coming from credit cards. However, it has expanded to offer other financial products and services such as auto loans and checking accounts. You can open a checking account, saving account, or even a money market account with Capital One. Its checking and savings accounts earn solid rates and don’t charge monthly fees. Capital One operates on a hybrid model, so it has physical branches and online banking features.
Comenity Direct Bank
Comenity has been working behind the scenes for over 30 years on credit card programs with some of the biggest names in U.S. retail. Since 1986, it has managed many private label, co-brand, and business credit cards. After getting its start in credit cards, Comenity introduced its consumer-facing brand Comenity Direct Bank in 2018, offering savings accounts and CDs.
CIT Bank is the banking subsidiary of financial services company CIT Group and offers personal banking products to consumers, as well as business and commercial banking. The online-only bank offers three main financial products: savings accounts, CDs, and IRA CDs.
Discover is one of the largest credit card issuers in the United States, but also offers online banking, home equity loans, student loans, and personal loans. Some of its retail products include CDs, checking accounts, money market accounts, and a high-yield savings account – all with no fees. It’s an ideal choice if you’re looking to manage your bank accounts and credit cards all in one place.
Live Oak Bank
Founded in 2008, Live Oak Bank is headquartered in Wilmington, North Carolina. It has personal and business banking products including small business loans, online savings, and CD accounts. Live Oak was founded as a lender focused exclusively on financing veterinary practices, but now works with business owners in agriculture, insurance, and health care.
Marcus by Goldman Sachs
Marcus by Goldman Sachs is a consumer bank that specializes in a few products including online high-yield savings accounts, CDs, and no-fee personal loans. It was founded in 2016, and has $50 billion in deposits since launch. The brand was named after Marcus Goldman, one of the founders of Goldman Sachs.
Sallie Mae Bank
For a long time, Sallie Mae has been known for creating, servicing, and collecting private education loans. But it also has a consumer bank business that offers savings accounts, money market accounts, and CDs. It’s headquartered in Salt Lake City and operates as a subsidiary of SLM Corp.
Synchrony Bank is a subsidiary of Synchrony Financial, a financial services company based in Stamford, Connecticut. With this online-only bank, you can open traditional and IRA CDs, as well as savings and money market accounts. The bank also partners with dozens of retailers, such as Amazon and Lenscrafters, to issue store-branded credit cards.
TIAA Bank, formerly known as EverBank, is a full-service bank that offers certificates of deposits, as well as checking, savings, and money market accounts. It’s based in Jacksonville, Florida. There are several branches across Florida that offer in-person services, but it primarily operates as an online bank.
How Do CDs Work?
A CD is a deposit account where you agree to leave your money in the account for a set period of time, with a set rate of return known as an APY. The main benefit of a CD is your money grows over time with fixed interest, usually higher than a typical savings account. The trade-off is that you agree to leave the account untouched for a specific amount of time, known as the term. The most common CD terms are one year, three years, or five years. One thing to note is money in a CD account will commonly be assessed penalties or fees for early withdrawal before the CD term is up.
When Are CDs a Good Investment?
CDs offer a guaranteed way to earn interest on your money and can help you reach your savings goals faster. But the timing of your investment can play a big role in how much interest you’ll earn. With today’s low-interest environment, you won’t earn as much back on a CD, but you’ll still find yields higher than what you’ll get with most conventional big-bank savings accounts. If you have extra cash that you don’t need in the near future, a CD could be a smart investment in times of economic instability — especially since your rate of return is guaranteed for the duration of the term. Knowing the future value of the account, you can plan ahead. When the CD’s term is up, you can redirect those savings elsewhere or reinvest in another CD account.
How to Choose a CD
CDs come in all shapes and sizes: There are traditional CDs, bump-up CDs, zero-coupon CDs, and more. But before choosing any CD, do some homework and figure out how much you’re willing to invest. If you’re saving for retirement, paying off your debt, and have at least a few months’ savings in a liquid account, you can consider putting excess savings into a CD. Just make sure you won’t need that money for the duration of the term — and research the early withdrawal penalties just in case.
Types of CDs
Take time to figure out which type of CD is best for your financial goals. Here are a few to consider:
This type of CD, also known as a standard CD, is as straightforward as it gets. You can open a traditional CD at just about any bank, credit union, or other financial institution. It has a fixed interest rate, a fixed term, a minimum deposit, an early withdrawal penalty, and federal deposit insurance. There are a variety of fixed interest rates and terms to pick from, typically from three months to five years. If you’re looking to add CDs to your savings strategy, a traditional CD is a good place to start. Other CD types resemble traditional CDs with only a few differences.
Imagine a CD where you can withdraw your money anytime at no cost. With a no-penalty CD, you can do just that.
But there’s a trade-off when it comes to no-penalty CDs. In exchange for more liquidity, they often come with lower interest rates and may require higher minimum deposits. Also, there may be an initial waiting period before withdrawal, or you might not be able to partially withdraw from the CD.
Bump-Up and Step-Up CDs
Bump-up and step-up CDs both let you maximize interest in a rising rate environment, but there are some differences between the two. With a bump-up CD, you can request that the bank raise the interest rate on your CD. You can only request a rate boost for a bump-up CD if the bank offers new CDs at a higher rate for the same term. In a step-up CD, the bank gets to decide when to put in a rate raise.
Callable CDs are a little riskier than standard CDs, but they usually offer higher rates upfront. It’s called a callable CD because the bank has the option to “call,” i.e. close, your account at any time before it reaches maturity. So, you’ll receive your principal plus any interest already earned but miss out on potential interest for the rest of the CD term. A callable CD is usually called when interest rates dip.
You can buy a brokered CD through an investment firm, also known as a brokerage, although it’s still issued by a bank or credit union. They have a fixed interest rate, but brokerage fees could take a chunk out of your earnings. Most brokered CDs are insured by the FDIC, but you’ll want to double check with the firm. These CDs usually earn higher interest, but they’re harder to get out of if you decide you want your funds early. You can only access funds in a brokered CD before the term ends by selling the CD in a marketplace.
If you have a lot of cash on hand, you may consider putting it in a jumbo CD. A jumbo CD has a high minimum deposit requirement, typically over $100,000. In exchange for your higher deposit amount, jumbo CDs usually come with more competitive interest rates. For jumbo CDs, in particular, it’s important to remember deposit accounts at a single financial institution are only FDIC-insured for up to $250,000. For savings balances in excess of that, it makes sense to spread them around across multiple accounts at different FDIC-insured institutions.
Typically, you’re only allowed to make the single initial deposit when you open a CD account. But add-on CDs let you make contributions over time, similar to a savings account. It makes sense if you’re looking to increase your principal in addition to interest as the CD approaches maturity. Add-on CDs are rarer, however, so it may be difficult to find competitive rates. And the bank may limit how many deposits you can make over the CD’s term.
Best CD Rates By Term
1-year CD rates
- Ally Bank: 0.65% APY, $0 minimum deposit
- Marcus by Goldman Sachs: 0.65% APY, $500 minimum deposit
- Comenity Direct Bank: 0.60% APY, $1,500 minimum deposit
3-year CD rates
- Comenity Direct Bank: 0.85% APY, $1,500 minimum deposit
- Capital One: 0.80% APY, $0 minimum deposit
- Ally Bank: 0.75% APY, $0 minimum deposit
5-year CD rates
- Capital One: 1.00% APY, $0 minimum deposit
- Ally Bank: 1.00% APY, $0 minimum deposit
- Comenity Direct Bank: 0.90% APY, $1,500 minimum deposit
What Causes CD Rates to Change?
Several factors cause CD interest rates to fluctuate, primarily the federal funds rate set by the Federal Reserve. In March, the Fed cut rates to nearly zero, and recent economic projections show no expectations for rate hikes through 2022.
When the Fed slashes interest rates, it lowers the cost of borrowing money, incentivizes businesses to invest and hire more, and encourages consumers to spend more. But cutting interest rates has a negative effect on savings and CD rates. Banks typically react to the Fed lowering interest rates by lowering their own annual percentage yields (APYs) on consumer products. As a result, CD rates at banks and credit unions continue to fall into the low 1% range, which is right in line with basic high-yield savings and money market accounts. This similarity in rates, along with the greater liquidity that comes with a high-yield savings or money market account, means you should think carefully about if a CD makes sense for your personal savings strategy right now.
CDs and Taxes
The money you stash away in a CD is not taxable – but any interest you earned on the CD is. The same rule applies for interest earned in other types of savings or deposit accounts.
There is no specific tax rate for interest earned on CDs. It’s recorded as income, so the amount you pay will depend on your tax bracket. You can use a CD calculator to estimate your potential interest earnings.
A CD is just one of many options for savers to consider if they’re looking for a place to grow their funds. In more competitive rate environments, higher interest-earning potential was enough incentive to stash money in a CD. But that’s not the case in today’s zero-rate environment.
With CD rates so low, alternative investments can be more attractive. If you’re looking for a comparable rate of return and easy access to your money, it could be worth opening a high-yield savings account or money market account. That way, you can withdraw it as soon as you need it. But keep in mind: like CD rates, online savings and money market account rates continue to inch toward 1% and under. Most CDs let you lock in a rate while they fall on other account types, but consider whether that’s worth it in exchange for the availability of your money .
How to Build a CD Ladder
If you’re looking for a tactical way to boost your savings, a CD ladder could be an effective strategy. By spreading your savings across multiple CDs with different maturity dates, you can maximize interest even as rates remain low and set yourself up for success when rates do start to rise again.
The best part of a CD ladder is flexibility. As each CD matures, your savings will free up for you to either use or rollover into more investments. A ladder lets you sidestep one of the biggest cons of investing in a CD: limited access to liquidity.