Think twice before you fall in love with a CD.<\/p>\n
Browsing for attractive CD rates can be a bit like scrolling for partners on Tinder. There are new, exciting options every day that seem very tempting and worthy of your time. But the same principle holds true for both: tread carefully, as the most appealing options may not be what they appear to be. Take a closer look before you commit \u2014 and, above all, don\u2019t believe the hype.<\/p>\n
Certificates of deposit are investment vehicles where people can park their cash for a set amount of time with a guaranteed annual percentage yield or APY. Banks can borrow from the Federal Reserve, but retail deposits are often regarded as a more stable source. As interest rates rise, financial institutions are now offering CD rates hovering at 5% and above, double the top rate seen 12 months ago.<\/p>\n
Rates are competitive as large banks and, particularly, local banks and credit unions jockey for business, but experts say investors should not get too excited about CDs offering a 7% APY. They are few and far between, have too many restrictions, and you may get ghosted after they suddenly expire. In other words, they are promotional rates designed to create buzz for an institution \u2014 and headlines.<\/p>\n
These kinds of CD \u201cspecials\u201d can raise hope among consumers who are looking for risk-free, inflation-beating alternatives to an unpredictable stock market and uncertain economic outlook. They may believe there will be a wave of CDs offering such high APYs. Are big banks and credit unions that<\/em> desperate for our cash? No. Hence, the low caps on deposits, and the long list of sign-up restrictions.\u00a0<\/p>\n <\/p>\n \n \u201c<\/span>\u2018Such remarkable rates often serve a dual purpose: to entice new clientele and to stand out in the crowded financial market.\u2019\u201d<\/span>\n <\/p>\n Case in point: The Alpena Alcona Area Credit Union in Alpena, Mich. recently attracted a lot attention for its seven-month certificate of deposit at 7.19% APY, but it was only available to people who live, work or own property, worship, attend school in Michigan, or who work at the credit union or have a family member who is an existing member. It also has a maximum deposit of $7,000.<\/p>\n So much for the 7% CD. \u201cWe don\u2019t count promotional rates such as those,\u201d said Ted Rossman, a senior industry analyst at Bankrate.com. He says smaller institutions are more likely to have doorbuster CD promotions as larger banks have all the deposits they need, and compete in other ways with extensive branch networks, national television commercials, and stadium naming rights, etc.<\/p>\n Average yields are a better guide to where you can park larger amounts of cash. \u201cThere\u2019s a big disparity between average yields and the top yields,\u201d Rossman told MarketWatch. \u201cI think that speaks to market factors, including smaller- and mid-size financial institutions competing more on rates, and large banks not feeling the need to match them since they have all the deposits they need.\u201d<\/p>\n High interest rates are good for savers, but can impact consumers\u2019 ability to take out loans. \u201cThere\u2019s probably also a component of smaller\/mid-size banks wanting to raise more capital due to the recent bank failure tumult, whereas the largest banks don\u2019t have that concern,\u201d he said. But the amount of capital that even smaller institutions can raise with such seemingly generous offers, he added, is limited.<\/p>\n Investors are storing their cash for a year to see how the economy shakes out, said Dr. Dan Geller, a behavioral economist based in San Francisco. \u201cThat\u2019s why the balances of 1-year CDs are at a record high,\u201d he said. \u201cThe shorter the term, the higher the interest rate. But the 1-year is now the same as the 5-year CD. This shows that people want to stay in the middle. That\u2019s very unusual.\u201d<\/p>\n Banks know that the 12-month CD is a sweet spot for investors right now, said Ryan Greiser, a financial adviser in Doylestown, Pa.. As such, he said these rare 7% CD offers are supposed to grab your attention, but instead will leave most people with a significant amount of money to invest disappointed. \u201cSuch elevated rates are designed to generate visibility and buzz within the financial sector,\u201d he said.<\/p>\n Most attractive rates for both institutional and retail CDs tend to be in the low 5% range and, like all CDs, are backed by the Federal Deposit Insurance Corp., so the money people invest is secure. \u201cA 7% rate on a CD can be captivating and seemingly exceptional,\u201d Greiser told MarketWatch. \u201cHowever, it\u2019s prudent to approach these offerings with a discerning eye and a focus on the details.\u201d<\/p>\n Another rule of thumb: the higher the rate, the lower the maximum deposit, and the more hurdles people will need to clear in order to qualify. \u201cSuch remarkable rates often serve a dual purpose: to entice new clientele and to stand out in the crowded financial market,\u201d Greiser said. \u201cThese exceptional offers, while attention-grabbing, typically come with terms and conditions that necessitate careful examination.\u201d\u00a0<\/p>\n CDs offer short-term security. People are confused about the economy. Inflation and prices are high, yet the economy grew by 2.4% in the second quarter. \u201cPeople would never have believed that a billion-dollar bank could go out of business within days,\u201d Geller said, citing the failures of Silicon Valley Bank, Signature Bank in New York and First Republic in San Francisco earlier this year.\u00a0<\/p>\n \u201cSince inflation has come down in recent months, it\u2019s really nice to see these top savings and CD yields exceeding inflation,\u201d Rossman added. \u201cSavers are not just maintaining their purchasing power, but actually increasing it a bit. Of course, stocks still offer much better long-term growth potential, but CDs are more attractive now than they have been in years.\u201d<\/p>\n But there are limits to the CD gravy train. When an institution offers a special CD rate far above the competition \u2014 especially if it carries a relatively high maximum deposit demand \u2014 the institution is typically forced into ending the special offer early, said Ken Tumin, founder of DepositAccounts.com, which tracks CD rates. In some cases, he added, the offer can close in a matter of days.<\/p>\n A final warning for investors: Many special CD rates are set up to auto renew into a standard CD with a similar maturity, and the depositor may not read the bank\u2019s notification of a rollover, or simply forget to move their money. \u201cThose standard CD rates can be way below market levels,\u201d Tumin said. \u201cWhen this happens, the institution may be able to offset the extra cost of the CD special.\u201d<\/p>\n That\u2019s when the special rate turns from a CD prince into a frog.\u00a0<\/p>\n<\/p><\/div>\n
\n \u2014 Ryan Greiser, a certified financial planner in Doylestown, Pa.<\/span>
\n <\/small><\/p><\/div>\n<\/p><\/div>\nCD specials are all about creating a buzz\u00a0<\/strong><\/h2>\n
Stocks still offer better long-term growth<\/strong><\/h2>\n