Is CD safe in one-star bank?

Don TaylorQuestionDear Dr. Don,
I tend to believe that it's safe to open a $50,000 CD with a bank that has only a one-star rating because the money would be FDIC-insured should the bank go under. Do you agree with me?
-- Corny Compounding

AnswerDear Corny,
I'm with you. If I'm shopping for an insured deposit, I'm less concerned about the bank's safety rating than I am about the yield on the deposit.

The only niggle is that, while it's clear that a deposit insured by the Federal Deposit Insurance Corp. (or by the National Credit Union Share Insurance Fund at a credit union) carries the full faith and credit of the U.S. government, it's not clear where the funding authority comes from for that backing. I discuss this in greater depth in an earlier column, "U.S. government stands behind deposit."

In another column, "CD is safe despite bank's struggles," I say the following: "Choosing where to deposit your money is always a trade-off between yield, safety, liquidity and convenience. An insured deposit doesn't really have any safety downside, leaving you the trade-offs between the other investment attributes."

The belt-and-suspenders type of depositors are always going to want to get a sense of a bank's safety rating, even if they're fully insured by the FDIC or NCUSIF. It gives them an idea of how the bank is managed. If you can get the same yield from a four-star bank as from a one-star bank, why lend to the one-star bank?

When shopping for CDs using Bankrate's rate search function, you'll notice that Bankrate shows the institution's star safety rating. You can get more depth by using the "Bank Ratings for Thrift, Credit Union and National Banks" feature.

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