Following historic patterns, as the economy begins to perk up and the Federal Reserve hints at a possible interest rate rise, investors are losing interest in classic CDs, and banks are responding by offering a growing number of alternative rising-rate CDs.
Bankrate.com, in its 2011 Rising-Rate Survey of those products, said that it found a surprising range of opening interest rates among liquid CDs, which allow investors to withdraw funds without penalty, step-up CDs, which raise rates at preset intervals, and bump-up CDs, which give investors a certain number of opportunities to opt for higher rates.
“The terms in all three categories vary widely, as do the interest rates,” said Greg McBride, a senior financial analyst at Bankrate.com. “That means that the customer has to really shop around for the best deal.” He adds that people should also compare the whole class of alternative CDs with the alternatives of a higher-yielding savings account or with traditional CDs, because the rising-rate products generally offer their provisions at a cost in terms of interest.
McBride said there is no real correlation between how high interest rates are and how restrictive a product’s terms are, making shopping all the more important.
For example, consider the case of liquid CDs (which aren’t really “rising-rate,” but which allow the holder to withdraw money before term without penalty). Offerings range from the extremely restrictive, such as Colonial Savings of Dallas’s 36-month CD, which pays 1.67%, but allows only one penalty-free withdrawal of up to 50%, to the relatively liberal Suncoast Federal Credit Union product, which pays 1.3% on its 36-month CD, but allows withdrawals or a closeout, penalty free.
Meanwhile BB&T in Washington, D.C., which offers a liquid 36-month CD that permits up to four penalty-free withdrawals a year, pays only 0.75% interest, and withdrawals must be for tuition or to buy a home.
Similarly, the 24-month bump-up CD products surveyed by Bankrate.com show an interest range running from Sovereign Bank’s 0.15% starting rate to to Ent Federal Credit Union’s 1.36% rate, yet both offer the same one-time opportunity to bump up the rate.
In the step-up category, the range of offerings is widest, running from PNC's s 36-month CD that kicks off at a 0.25% annual yield rising at six-month intervals to 1.4% for a yield to maturity of 0.82%, to American Airlines Federal Credit Union’s 36-month CD that starts at 1.76%, rising in two steps to 2.78% for a yield to maturity of 2.27%.