CD rates, and deposit rates generally, are laughably low right now. Bankrate's latest numbers for one-year CD rates have the average at 0.44 percent, and the highest rate on Bankrate's one-year CD rate table is 1.31 percent. So it's no wonder that many who would normally be saving appear to be taking those extra dollars and paying down debt instead.
According to the latest data from the Federal Reserve, revolving consumer debt, much of which is made up of consumers' credit card debt, is at $790 billion, the lowest it's been in absolute terms since June 2004.
That this massive debt paydown is coming as CD deposits continue to shrink -- reaching a six-year low of $839.2 billion for small-denomination timed deposits -- suggests that some consumers are choosing to pay off their credit cards and other debts rather than sink more money into the lackluster CD market.
This shift has been going on for some time. Market Rates Insight had a report in September of last year that noted a similar phenomenon:
Time-deposit balances declined from $2,365 billion on January 1, 2010, to $2,165 billion on June 30, 2010, as $200 billion in maturing CDs were not rolled over. Out of the $200 billion decrease in CD balances, consumers used $29 billion, or 15 percent, to pay down credit card and other evolving debt.
The remaining funds from maturing CDs, $171 billion, was shifted to liquid accounts such as checking, saving and (money market) accounts.
That suggests that as long as CD rates remain in the basement, banks are likely to see CD investors stay away in droves. And really, investors are just acting rationally. Why should you pay 14 percent on credit card debt while getting 1 percent, if you're lucky, on your savings?
What do you think? Is it smarter to just pay off debt, rather than sink new money into a CD account?