Online CD shopping primer
If you're looking to compare rates on certificates of deposit, or CDs, one of the first places to turn is your home computer.
"You pick the time and place," says Greg McBride, CFA, Bankrate's senior financial analyst. "There's no waiting and no need for appointments."
While online CD comparison shopping delivers a convenient look at interest rates, you will still need to do some additional research to ensure you are getting the best fit for your finances. Here are five questions to answer during your online CD shopping trip.
What will an early withdrawal cost you?
Some banks include a general online disclaimer that a fee will apply for any early withdrawals, but the cost of the fees can vary widely in amount. While typical penalties range from three to six months' worth of interest payments, some institutions charge as much as two years' in interest.
"Being aware that a penalty exists is not sufficient," McBride says. "You have to know exactly what the penalty will cost you."
That cost can mean losing some of your initial savings investment as well. McBride says 92 percent of banks will dip into the principal balance to satisfy an early withdrawal penalty if the accrued interest does not cover the cost.
Do interest rates seem too high?
"If you see yields that are significantly higher than the highest yields on Bankrate.com, that should raise a red flag that you're not encountering a run-of-the-mill CD," McBride says.
The Federal Deposit Insurance Corp., or FDIC, warns that extraordinary rates typically mean one of two troubling realities: The CD lacks FDIC insurance or the above-average rate is a promotional ploy to entice online CD shoppers. In many cases, the FDIC warns that high CD rates only apply to a small portion of the funds.
If you are concerned that an institution may not be federally insured, you can easily determine if the cash in your account will be secure up to the $250,000 limit by using a search tool on the FDIC website.
How accessible is your accruing interest?
If you're planning to use your interest earnings for spending money, different financial institutions have varying arrangements for how often you can access your money.
Beth Coggins, spokeswoman for Ally Bank, says that customers can choose when to receive interest payments when they apply to open a new online CD.
While the bank allows customers to withdraw accrued interest as frequently as once each month, Coggins cautions that withdrawals do hinder earning potential.
"Keeping the interest in the account will maximize potential earnings," Coggins says.
Still, some savers are looking for more than the greatest yield at the end of the term. McBride says retirees often use CDs to generate a regular stream of interest income.
"You'll want to make sure that the availability of interest is consistent with your investment goals," McBride says. "Be sure to determine that you can receive those interest payments at an interval that meets your spending needs."
What happens during the renewal period?
As your CD renewal date approaches, you can expect an extra envelope from your bank to arrive in the mail. Federal Regulation DD requires that financial institutions send an upcoming maturity notice 30 days prior to the CD's maturity date.
Even though laws require early warning, McBride recommends taking a proactive approach for remembering that all-important deadline.
"Put a reminder on your email calendar or your handheld device for that CD maturity date," McBride says. "You don't want to be on vacation that week."
Renewal may bring some additional questions. BECU spokesman Todd Pietzsch says for retirees who invested in CDs five years ago, that renewal may be a rude awakening to today's lower interest rates. Before choosing to renew, they may want to talk with an investment adviser to determine how they can meet their monthly income needs.
Still, the time frame to discuss saving objectives is limited. McBride says most financial institutions offer a maximum grace period of 10 days when it's time to renew a CD. After that, the CD automatically rolls over into a new term.
Are additional strings attached?
If you're looking to lock in the highest online CD rates, then you may need to consider the rest of your personal banking needs. Some banks and credit unions offer more competitive rates for customers who extend their account relationships further than a certificate of deposit.
Shawna Thompson, BECU senior product strategy manager, says members can also qualify for higher online CD rates if they can meet some additional requirements by opening a checking account and savings account, enrolling to receive e-statements and conducting at least one monthly remote transaction such as direct deposit or online bill pay.
Because of this type of offer, McBride recommends extending an online CD search to compare CDs at credit unions, local and community banks, and your current financial institution.
"Casting a wide net is how you're going to uncover the best deal," McBride says.