When you're on the hunt for the best CD rates on a certificate of deposit, every tenth of a percentage point of yield makes a difference, especially when interest rates are at a historic low. But if the best rates are from banks, credit unions or savings and loans with low Bankrate.com Safe & Sound Ratings, does it make sense to go for the yield when the bank is at risk?
The answer is, it depends. "Technically, consumers have nothing to worry about as long as they stay under FDIC (Federal Deposit Insurance Corp.) limits, which are $250,000 through 2013," says Robert Laura, a financial adviser and president of Financial IQ in Farmington, Mich. According to the FDIC Web site, a CD that matures after Dec. 31, 2013, would have its insured limit reverted back to to $100,000, except for certain types of retirement accounts.
The site also states that if you have more than those amounts to invest, it may make sense to break up your CD purchases by buying CDs from different institutions to stay under deposit insurance limits. Should you invest in a CD and the institution fails, the FDIC is required to make good on your investment as soon as possible. This can involve transferring your CD to the institution that acquired the failed bank or sending you a check for the balance due on your CD.
While the FDIC generally makes good on insured deposits quickly, it's wise to have other liquid funds in an insured checking or savings account elsewhere, says Bryan Hopkins, CPA, CFP and president of Hopkins Wealth Management in Anaheim Hills, Calif. "It could take as long as 90 days to get your money, so it's a good idea to have funds elsewhere to cover day-to-day expenses," he says.
The FDIC site also has information on what happens if you bank does fail. If your CD is worth more than deposit insurance limits, you may receive some or none of that balance at a later date, depending on whether the FDIC is able to sell the failed bank's assets and at what price. The FDIC provides an FAQ on federal deposit insurance.
Though deposits are insured up to $250,000 currently, it does make sense to pay attention to safety and soundness criteria, such as Bankrate's Safe & Sound ratings, which evaluates a bank based on an individual institution's capital adequacy, asset quality, profitability and liquidity, Laura says.
"Psychologically, a bank's ratings are important and consumers should use them," he says. "Most consumers, especially older ones, remember the Great Depression."
While bank failures are handled very differently now than they were then, "nobody wants it to be the case where things don't go smoothly" and have their money be in limbo for months.
CD rates for banks with lower Bankrate Safe & Sound Ratings may be higher than those with higher ratings because those banks may be trying to build up their deposit base by offering higher yields through brokers to consumers. In early December, one-year CD rates varied from 0.5 percent from a bank with a four-star Safe & Sound Rating, to 2.08 percent from a bank with a one-star Safe & Sound Rating. However, there were several banks with one-, two-, three- and four-star safety and soundness ratings, offering CD rates from 1.7 percent to 1.99 percent.
In some case, banks with lower ratings offered lower rates than higher-rated banks, so lower-rated banks don't always offer higher rates. Some higher-yielding CDs may come with higher minimum deposit requirements. Some banks may be seeking deposits with a particular maturity, so they may offer better terms on some CDs than others.
In many cases, the difference between higher yielding CD rates and lower yielding rates isn't much. For example, if you buy a $10,000, one-year CD with a 1.9 percent interest rate, compounded daily, you'll earn $191.81 in interest. If you buy the same CD at a lower rate, 1.6 percent, you'll earn $161.28 -- a $30.63 difference.
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