Savvy savers are flocking to CDs — here’s why you should too

The most lucrative CDs are offering interest rates upwards of 5%, the highest they’ve been since the mid-2000s. Although you can typically find the best rates on longer term CDs, during this economic cycle, since October, CDs with 1-year terms have been offering the best returns.

According to Bankrate, the average CD rates for the week ending March 29 are:

• 1-year CD yield: 1.64% APY

• 5-year CD yield: 1.24% APY

• 1-year jumbo CD yield: 1.72% APY

• 5-year jumbo CD yield 1.29% APY

• Money market account yield: 0.32% APY

But those are just the averages — you can do much better if you shop around. Many online banks are offering CD rates that are much higher. Here’s what to know.

A CD is like a promise between you and your bank or credit union: You commit to leaving your money in place for a certain period of time, and the institution will pay you the same amount of interest for the length of the term. The bank rewards your commitment with higher interest rates. 

Banks aren’t just handing out interest out of the goodness of their hearts: Higher interest rates attract customers, and more customers putting money in CDs means the banks have more sure money on hand to help fund loans. And the interest banks earn on loans is how they make money.

The typical CD term lasts from 3 months to 5 years. Once you deposit a sum in a CD, you must leave it there for the entire length of the term or risk forfeiting a portion of the interest you’ve earned, which is known as an early withdrawal penalty. (There are no-penalty CDs, but they tend to offer lower interest rates.) Early withdrawal penalties usually amount to:

Some CDs require a minimum deposit, but they usually don’t have any monthly fees. They’re usually insured up to $250,000 per account, per depositor, as long as they’re opened with a federally backed institution (look for a seal from the Federal Deposit Insurance Corporation for banks or the National Credit Union Administration for credit unions).

When your CD reaches the end of its term — that is, when it matures — you have a few options, but you need to act quickly. You may renew the CD at the current rate; rollover the CD into a different CD or another account; or withdraw the money. Most institutions give you seven days to decide. If you don’t do anything, the bank will usually renew the CD at the current rate, which might be higher or lower than when you originally deposited your money. (A high-yield savings account, on the other hand, lets you move money in and out almost as often as you please — more on that later.)

There are a lot of great reasons to open a CD, but they’re not for everyone. Here are a few things to consider.

The good

• Higher interest rates than other types of savings accounts

• Interest rates stay the same even if the market shifts down

• Predictability — you know how much your money will grow

• Security, as long as the account is federally insured

The bad

• Money is locked up for several months to years

• Potential for missing out on better interest rates if the market shifts up

• Penalties for early withdrawal

• Lower long-term return than you’d get from the stock market

That being said, CDs can play an important role in a healthy financial plan. As long as you can afford to part with a portion of your money for a certain period of time, they can help your money grow faster than it would in a checking account (which earns almost zero interest) or a traditional savings account. (The average APY for savings accounts was 0.23% as of March 29, according to Bankrate’s weekly survey.)

Another type of account that’s earning better interest rates these days: high-yield savings accounts. In some cases, you can find interest rates above 4% on high-yield savings accounts, which is 1,600% higher than the average. The reason these accounts have such good rates? They’re typically offered by online banks, which don’t have the overhead of big, brick-and-mortar institutions.

High-yield savings accounts function exactly like traditional savings accounts: You can typically deposit money as often as you like and earn interest from the bank. While some institutions limit how often you can withdraw funds (typically no more than six times a month), you aren’t locked into a term the way you are with a CD. Some banks also require a minimum deposit and may charge monthly maintenance fees.

What you gain in flexibility with a savings account you lose in predictability: Interest rates on high-yield savings accounts aren’t fixed, so they can move up and down at any time. That being said, they’re a good option for your emergency savings, as well as for money you know you’ll need to access soon (say, your vacation fund). 

Between turmoil in the banking system and questions about the Fed’s next moves, there’s a lot to process right now around your finances. But CDs can offer you both certainty and higher interest rates than we’ve seen in years. The Fed has indicated an upcoming policy shift around inflation, moving from raising interest rates to tightening credit. That would mean that interest rates on CDs have likely peaked. If so, this very moment is a perfect time to consider whether a CD will help you maximize your savings for the long haul.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected].