April 18, 2011 in CDs

Rising-rate CDs offer flexibility with a price

Editor’s note: This is a transcript of the audio file.

To get CD investors off the fence in a time of record-low rates, banks are offering CDs with rates that can rise if the market improves. But are these products a good deal? To find out, Bankrate surveyed 125 rising rate CDs from banks and credit unions all over the country. I’m Claes Bell with the Bankrate.com personal finance minute.

Bankrate found three basic types of rising-rate CDs in the market right now. Bump-up CDs allow investors to raise their rates a limited number of times during the CD’s term. Step-up CDs rise at scheduled times during the course of the CD’s term. Liquid CDs allow investors to transfer money out of a CD, usually with some conditions on how it can be done, so it can be reinvested in higher-rate CDs should interest rates rise.

Overall, we found that whichever type of rising-rate CD you gravitate, toward there’s no free lunch. Our survey found most rising CD rates lagged the best available rates on traditional CDs, at least at the beginning. While rising rate CDs might make up the difference later, there’s a risk they won’t.

For more on what Bankrate found out about rising rate CDs, check out our 2011 Rising-Rate CD survey at bankrate.com. I’m Claes Bell.