Four Factors that Determine CD Rates

If you have ever invested in certificates of deposit at your bank or researched the various CD rates, you might wonder why the rates fluctuate during different times and even among different banks. Believe it or not, there are some factors that actually dictate the CD rates that are out there. Here are a few of those factors to help you better understand where the banks get the rates from.

CD Maturity
CD maturity refers to the length of time that you keep a CD account. CDs can range from 6 months to five years and possibly even longer. Typically, the longer your CD maturity, the more interest you will earn on the money in the account. For example, a 6-month CD may only pay 0.5 percent interest while a 5-year CD may earn 2 percent interest or more. However, if you take money out before the CD matures, you will pay a large penalty.

Current Interest Rates
The current interest rates and financial market will have a major impact on the CD rates you find at various banks. While the current market may help determine a baseline rate, some banks will offer a rate that is more or less depending on the individual bank’s volatility and the competition in the surrounding areas. When you see the feds raising interest rates, you can be sure that CD rates are sure to increase before long, too.

Enticing New Customers
When banks are trying to lure new customers to use their institution, you will usually find higher CD rates at those individual banks. Banks know that there are always customers shopping around for great rates and they will offer higher rates for introductory customers just to get your business.

Banks vs. Credit Unions
You will generally find that credit unions have higher rates than banks. This is because credit unions are non-profit institutions so they are in a position to offer their customers a little more interest for their money.

The best thing to do when looking for the best CD rates is to shop around at different banks in your area and online. You can find major fluctuations between various institutions so never just settle for using the bank you already have. With some extra research and homework on your part, your money will work much harder for you.