Certificates of deposit (CD) rates from online banks are often above average if you are willing to open and manage your account using the Internet. Most online banks offer an online application and money can be transferred to fund the CD via an electronic transfer, check, wire, or credit card. You can view a financial snapshot of any online bank by clicking on its name and then the Financial Details tab.
September 30, 2016
1 Year CD National Average: 0.38% ?
|APY||Vs. Nat'l Av.||MIN|
|Sallie Mae Bank||1.25%||3.28x||$2,500||
|Colorado Federal Savings Bank||1.25%||3.28x||$5,000||
|Barclays Bank Delaware||1.20%||3.15x||$0||
|Navy Federal Credit Union||1.15%||3.02x||$100,000||Comments|
|Pentagon Federal Credit Union||1.01%||2.65x||$1,000||Comments|
|Bank of Internet||1.00%||2.62x||$1,000||Comments|
|Capital One 360||0.90%||2.36x||$10,000||Comments|
|USAA Federal Savings Bank||0.76%||1.99x||$175,000||Comments|
|CNB Bank Direct||0.66%||1.73x||$1,000||Comments|
|New Dominion Direct||0.60%||1.57x||$1,000||Comments|
|American Express Bank, FSB||0.55%||1.44x||$0||Comments|
Certificate of deposits are offering by most bank in a variety of maturity dates. The 1-year rates in the table above are listed in descending order based on Annual Percentage Yield (“APY”) which is the rate of return that you will earn, when adjusted for compounding, over a 12 month period, and the way in which banks are required by US banking regulations to advertise their CD rates.
A certificate of deposit represents a time commitment between a depositor (someone who has money to put in the bank) and a bank. The depositor agrees to leave a specified amount of money in the bank for a set period of time. The bank agrees to keep the money safe and to provide a fixed rate of return.
A 1-year CD has a very brief time commitment and can also generate a rate of return above the prevailing savings rate. Therefore, many people use 1-year CDs to slightly augment their rates of return over savings with only slightly more risk than they would have if they were entirely in savings accounts and money market accounts.
Provided the bank is FDIC-insured and the deposit amount is within FDIC limits, the principal is also secured by an agency of the United Stated federal government against loss. Further information about FDIC insurance is found in this article (hyperlink - https://www.bestcashcow.com/articles/now-is-a-good-time-to-check-your-fdic-and-ncua-coverage-9187) and if you have specific questions about your own circumstances you should use the FDIC’s Electronic Deposit Insurance Estimator.
The principal of a CD is safe and insured as long as the deposit amount is FDIC limits. Interest that accrues and is paid or deposited to the principal also is safe as long as the total balance remains within FDIC limits.
A CD however bears two significant risks:
Be sure to think about how CDs fit into your overall portfolio objectives.
An effective strategy used by many to bolster their savings strategy is to own CDs with various maturities. In other words, a depositor with $400,000 and put $100,000 in a 3 month CD, $100,000 in a 6 month CD, $100,000 in a 9 month CD and $100,000 in a one-year CD, then your liquidity risk in highly diminished because you are always near maturity on one of your CDs. (Note that no more than 2 of these CDs should be at the same bank in order to avoid exceeding FDIC limits).
The reality is that we are in a very low interest rate environment, and any CD with a maturity of less than 1 year is going to pay below, perhaps well below, the prevailing rates in the leading online savings accounts or at brick-and-mortar banks. Therefore, the strategy outlined above would be largely absurd in the current environment.
A laddering strategy that would make more sense for the same depositor who might otherwise hold $400,000 in cash would be to put $100,000 in a one year CD every three months. Liquidity risk in the same way is diminished as the depositor is never more than 3 months from maturity, yet the depositor is picking up some small improvement over the best savings rates than where all of his money to be in cash.
Laddering strategies can also involve longer term CDs, but one that involves terms as little as 1 year can improve on the savings rates with minimal impairment to your liquidity.
More information on CD laddering is available in this article.
The method of distributing the interest earned on a CD varies by bank. Some banks pay interest monthly, other semi-annually, and others at the maturity of the CD. In general, online banks pay the interest electronically either by adding it to the principle balance or with an ACH transfer back to the depositor's primary linked checking account. Other online banks may pay via a check in the mail.
Currently, the most competitive banks offer 1-year rates that are slightly above the top online savings and money market rates. Depositors need to decide if they want the fixed rate of the CD or the flexibility of the savings account (savings accounts do not come with any term time requirements).
In a rising rate environment, it is generally better to keep money flexible and liquid and put it into either short term CDs or savings or money market accounts. In a falling rate environment, it is generally better to lock the rate using a CD or some other fixed rate investment. In a stable rate environment, you may be able to collect a small premium in exchange for your loss of liquidity.
Online banks generally offer CDs available to residents of any of the 50 states. The CD must be opened online and funded either by online transfer or by mail.
CD rates are the fix rate that the bank pays a depositor for entering a CD for the entire term of a CD. They are expressed in annual percentage yield (“APY”) terms, so that they are standardized. $100,000 invested in a one year CD at 1% will be worth $101,000 at maturity in exactly 1 year. $100,000 invested in a two-year CD at 1.50% will be worth $101,500 in exactly 1 year and worth $103,022.50 at maturity (assuming the interest is not paid out before maturity, but is added to the principal). Please see BestCashCow’s Savings Booster Calculator to better understand the magic of compounded interest over time.
Interest may be paid on any interval, but the rates that you see listed are required to be expressed / standardized by all banks as an annual percentage yield (“APY”) rate.
CD rates on terms of 1 and 2 years have been very constantly low for many years now as the Fed Funds rate has now been at zero from the great recession of 2009 to 2015. We saw a slight uptick in 2015 as the Fed raised rates by 25 basis points and indicated further Federal Reserve action towards normalizing interest rates in 2016. However, longer term CD rates have fallen in 2016 as long term interest rates have fallen due to the European financial crisis and Brexit, and the expectation on Wall Street that US Federal Reserve action towards normalizing interest rates will be substantially slower than earlier expected.
If the Federal Reserve accelerates its plan to raise the Fed Funds rate or if global economic developments were to cause US treasury rates to rise, we would quickly see higher CD rates. However, the global economic environment is uncertain with European long-term interest rates being negative. Should the US also enter a recession and the US 10-year Treasury rate fall still further, it is possible that CD rates could fall further.
BestCashCow lists the best CD rates available from online banks above, and the best rates from local banks and credit unions. A good rate is the best rate that you can find at an FDIC or NCUA-insured institution, provided that it compensates you adequately over the best savings rates for the liquidity that you are giving up. Only you can determine based on your own personal circumstances whether that is a good CD rate for you. BestCashCow’s Savings Booster Calculator can help you to understand how much more interest a CD can generate over a savings account.
All banks listed on BestCashCow are FDIC insured; BestCashCow.com strongly recommends that you stay within FDIC insurance limits and that if you are unsure of how the limits affect you, you visit the FDIC website.
To understand all of the income generating options available to a saver, please view the Income Generating Investments Comparison Chart.
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