If you have enough money in your savings account that you can afford to put money in the bank and leave it there, a certificate of deposit can be a great way to make some extra cash in the form of interest. These five expert tips can show you how to get the best CD rates to earn the most interest.
1. Turn Away From Traditional Banks
One thing you can do to get the best APY rates is to avoid traditional brick-and-mortar banks. Typically, rates of online financial institutions, such as Ally CD rates, will offer better interest than brick-and-mortar bank rates, like Chase CD rates. Online banks make opening an account easy, and they’re available nationwide, so you’ll have access to your account anywhere in the country.
Credit unions also typically have higher CD rates than traditional banks; however, the downside to a credit union is that you have to qualify to become a member. The great rates offered might make it worth the hassle, though. Navy Federal Credit Union, for example, offers rates over 1% APY for any CD term 12 months or longer. If you’re looking for a high CD rate, a credit union or an online bank could be the best place to put your money.
How To: Open a CD Account
2. Use a CD Ladder
The longer the CD rate term, the more interest the CD pays. Thus, instead of using your money for a one-year CD, you’ll make more money putting it in a five-year CD. The most money of all, however, can be made with a CD ladder. If you’re willing to think long term and can afford for your money to be tied up for years, CD laddering is the way to go.
Instead of putting all of your money in one five-year CD, you can spread it out over the course of five years with short-term CDs. Each time the maturity date is reached — at the one year point, the two year point and so on — you can potentially earn more money off the interest rates. The interest you earn at each maturity date — no matter how small — should then go back into a longer-term CD. With each year that passes, you’ll put more into your CDs and earn more money.
A CD ladder isn’t going to let you quit your job, but it will help you get the highest rate possible for all of your money. By rolling your money from one short-term CD into another over the course of several years instead of locking your money into one long-term CD, you’ll be able to take advantage of interest-rate increases between your maturity dates.
3. Use a CD Barbell Strategy
Like a ladder strategy, a CD barbell strategy is another way of diversifying to mitigate interest rates and reinvestment rate risk. The major difference between a barbell and ladder strategy is how your CDs are spread out. In a ladder strategy, you evenly distribute your money in staggered CD terms, such as one-year, two-year, three-year CDs, and so on. In a barbell strategy, you place your money in only two different CD types: long term and short term, with the majority of your focus on the short-term end.
The short-term CD rates reach their maturity date every year or two, depending on the CD. You receive interest every time the maturity date comes around. As you keep rolling your matured short-term CD money into new short-term CDs, you can potentially earn more interest more quickly, although it still might not be as much as the long-term rates offer. Whenever rates go up, you’ll make that much more interest with your short-term CDs. And if interest goes down, you have the long-term CD and its higher rate as a backup.
4. Accept the Withdrawal Fee
Banks and credit unions frown upon withdrawing your money from a CD before the maturity date is reached, but it is allowed. The problem is that you have to pay a withdrawal fee — and as the term gets longer, the withdrawal fee gets higher.
If you really need to withdraw early, however, it’s possible to make money regardless of the withdrawal fee. You can potentially make even more money from a long-term rate than a short-term rate, if you do the calculations correctly. If you have a low-enough withdrawal fee, combined with a high-enough interest rate, it might be profitable to take out a long-term CD, as opposed to a short-term CD, and withdraw the money from the long-term CD when the short-term CD would have matured. This strategy doesn’t work in every circumstance, but sometimes it can work to your advantage to take the withdrawal fee at the long-term rate.
5. Negotiate CD Rates
Here’s one of the best-kept secrets in all of banking: Most people don’t know it, but your bank might be willing to negotiate your CD rate for a higher interest level. The odds are greater that they will negotiate with a jumbo CD rate, but some financial institutions are willing to do so with a normal CD rate. Not many financial institutions will negotiate the majority of their CD rates, but it doesn’t hurt to ask.
It’s becoming harder and harder to get good interest rates on regular savings and checking accounts. One way to circumvent this limitation is to put your money into CD accounts that offer higher rates. CD rates might seem static and unchanging at first glance, but combining CD types and regularly checking rate offers are ways to get better rates. Through careful planning, the use of different strategies and negotiation, it’s possible to get the highest CD rates available and the most interest possible.
Jamie Young contributed to the reporting for this article.