In low-rate times like these, nothing gets CD investors' attention quite as quickly as an ultra-high CD rate. It's true that many legitimate institutions, including some on Bankrate's CD rate tables, offer CD rates significantly higher than the national average. But sometimes shady financial providers use eye-catchingly high CD rates to lure in investors, only to pull a bait-and-switch and try to sell them on something riskier.
Allan Roth of CBS MoneyWatch has a blog about the reappearance of a CD bait-and-switch scheme he encountered in Denver earlier last year:
More than 15 months ago, I wrote about a 3.45 percent APY CD that was too good to be true. I knew it was too good to be true because when I went to buy it, I learned that no such CD existed. American First Assurance Nexity Bank claimed they were a broker representing the five-star-rated bank. In reality, Nexity Bank disavowed having any relationship whatsoever with American First Assurance, which turned out to be a one-star-rated bank that recently was shut down by regulators. What they were actually doing was suckering consumers into coming in for the CD and walking out with an insurance annuity or two.
Insurance annuities such as Equity Indexed Annuities are complex instruments that promise stock market returns without risk. In reality, they don’t deliver and are filled with tricks. Equity Indexed Annuities have developed such a bad name that the industry has attempted a name makeover.
Roth writes that despite an investigation into the company by the Colorado Division of Insurance, the company has since doubled down on its scheme:
CD rates have plunged over the past 15 months, yet that has not proven to be the case with American First. In fact, the 3.45 percent CD that was too good to be true is now replaced with this 3.95 percent APY advertisement taken from the May 1, 2011, Colorado Springs Gazette.
There's no denying the allure of 3.95 percent APY on a 6-month CD right now, with the Bankrate average for a 6-month CD hovering around 0.27 percent APY. But a yield that's nearly 15 times higher than the prevailing CD rate for that maturity should raise some red flags.
That's not to say CD investors shouldn't chase yield, but be careful where you're looking. If you ask about a CD rate, and the institution equivocates or says the rate isn't available, the conversation should end there. Nothing good can come of handing your money over to an institution willing to play bait-and-switch games, no matter how good the deal they're pitching sounds. You can do a "background check" on prospective banks using Bankrate's Safe & Sound Star Ratings.
Have you ever been promised a CD rate, only to have the bank pull a bait and switch?