CD rates Blog

Finance Blogs » CD rates » Low CD rates fueling card paydown?

Low CD rates fueling card paydown?

By Claes Bell, CFA · Bankrate.com
Monday, June 20, 2011
Posted: 2 pm ET

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?

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
6 Comments
Claes Bell
June 21, 2011 at 1:18 pm

Good eye, Damon. Those periods should have been commas, so it should be $2,365 billion, or 2.365 trillion, etc. It's been changed now. Thanks!

Damon
June 21, 2011 at 1:16 pm

Maybe you should proof read something is not right here....

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.

Some of these billions should be trillions or millions????

Frank
June 21, 2011 at 9:25 am

Imagine there's credit card debt, It's easy if you try, A hell below us, Above us isn’t only sky, Imagine all the people, Not Living for today...YES pay off your credit card debt is a good thing!!!

German Shephard Says
June 20, 2011 at 8:54 pm

Place high tariffs on all foreign made goods. Bring all of our military home, now. It's time to take care of ourselves before it's too late.

German Shephard Says
June 20, 2011 at 8:49 pm

Call in all credit card balances. Freeze the cards for 6 months. Forgive all mortgages. Let's get this thing over with, we are tired of seeing this sick man stagger around, trying to die. While being propped up with worthless infusions of Federal Reserve Notes. Do not renew the Federal Reserve's charter in 2012. Let the US Treasury mint the money, the way the Constitution outlines. Peg the Dollar to a basket of commodities such as wheat, electricity, vegetables, copper and so on,that are essential to people in their daily lives. Institute new and powerful antitrust laws that keep the few from controlling the free markets. The private banking cartel has outlived it's usefulness.