Bank CD Rates

What Drives Them—and How to Get the Best Ones

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Certificates of deposit (CDs) are safe places to keep money and earn interest. But what drives bank CD rates—why do they go up and down, and why do some banks offer more than others?

There are two primary factors that affect bank CD rates. They are:

  • The length of time until the CD matures
  • The current interest rate environment

Let's look at these, as well as a few other factors.

Length of Time

The longer you'll have your money tied up, the higher your rate will be. Check around, you'll find that rates increase as the length of time increases (for example, an 18-month CD will pay more than a six-month CD). This is because the longer you commit to leaving your money on deposit, the more flexibility the bank has to use your money. They are willing to pay you a better rate because they can earn more with your money over a longer time period. Of course, there are surprising exceptions to this rule in uncertain times.

Rates in the Economy

Current interest rates are also an important factor. That is, if rates happen to be high (or rising), bank CD rates will also be high (or rising). High rates don't just apply to CDs; they also apply to loans that the bank is making with your money. They'll charge borrowers a higher rate, and they can afford to pass more along to you.

Banks know that you have plenty of choices. If rates, in general, are high, somebody will be willing to pay you a decent rate on CDs because they can earn more than that by investing or lending the money. As a result, you can expect to see CD rates move more or less with other interest rates.

The chart below illustrates the discrepancies in CD rates depending on length. As you can see, the spread remains pretty constant and follows along with general trends in interest rates.

Other CD Rate Factors

Other factors can influence bank CD rates. For example, you may find that a bank is trying to win some short-term business by offering slightly higher rates. They know that there are people out there shopping for great CD rates, and they hope that once they get a customer in the door, that customer will stay (and bring over additional assets).

Another factor is the desired profitability. You may find that credit unions have rates that are slightly higher than bank CD rates. Banks might have to share their profits with investors or pay taxes on them. But, because credit unions are nonprofits, they can afford to offer a little more to members at the expense of higher margins.

Getting the Best Bank CD Rates

The first way to get the best bank CD rates available is to shop around. You can start with any credit unions or banks with which you already have a relationship. Ask about any specials coming up. Compare them to other banks in your area. You'll often find a great deal.

You can also use a brokerage account to shop for CDs. This gives you access to a wider selection of CDs, whereas many banks and credit unions only offer their own products. However, these brokered CDs may not all operate the same, so ensure you understand the terms and potential fees with both your broker and the issuing entity.

Use the two main factors mentioned above to your advantage. If you know you won't need the money for a while, lock it up for a longer term that enjoys higher interest rates.

It can also help to assess the broader interest rate environment. If you think rates are rising in the near future, a short-term CD will mature quickly enough to allow you to reinvest at those more attractive rates. Of course, it is very hard to predict interest rates and markets, so don't knock yourself out trying to time it just right.

If you have the freedom to invest for longer than five years, and you don't mind accepting some risk, a CD might not be your best option. If you can handle short-term volatility, investors have historically been able to achieve better long-term returns from riskier investments, like corporate bonds or index funds.

Finally, buy in bulk. If you want to get the best rates, sometimes you have to meet certain minimums. If you have your assets spread out at various institutions, you may be missing out on "preferred customer" or "jumbo CD" rates. Find out if institutions offer any advantage to consolidating your assets into a single CD.

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