Bank CD Rates

What Drives Them—and How to Get the Best Ones

Businesswoman shaking hands with clients at desk
••• Blend Images - JGI/Jamie Grill / Getty Images

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, from 2009 through today. 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

Here are a few suggestions that should help you get the best bank CD rates available: First, shop around. Start by checking your newspaper, mail, and banners on local institutions. Check DepositAccounts for local deals. You can also check any credit unions with which you have a relationship. Ask about any specials coming up. You'll often find a great deal.

Use the two main factors mentioned above to your advantage; if you really won't need the money for a while, lock it up for a longer term. Also, see what interest rates are doing. If you think they're headed up, you may benefit by using a shorter term because bank CD rates will be more attractive in the future. 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, a CD is probably not your best option. You'll find much higher interest rates on longer-term investments.

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" rates. Find out if there is any advantage to consolidating your assets at a given institution.