Wednesday’s quarter point increase in the federal funds rate won’t set any CD rates or bond yields on fire, but it's still long-awaited good news for frugal savers who put their money and trust in conservative investment accounts.
“What this means for savers is rates are going to move up,” says Pierre Habis, president of PurePoint Financial, a primarily online bank that is offering among the highest CD rates in the country at the moment.
And if the Feds follow through with two to three more increases this year, as expected, so much the better for those who have been searching high and low for any extra yield since the Fed cut rates to near zero following the Great Recession.
The federal funds rate is what banks pay when they borrow money from each other.
Just how much CD or savings account rates might increase in the short term, in response to the Fed, is unclear. Just before the Fed’s recent move, one-year CDs, for example, paid a feeble 0.24 percent annual yield, on average, according to the Federal Deposit Insurance Corp.
Nevertheless, savers itching for better options should be able to find them now. The last time rates were climbing, in 2005, new online banks popped up to meet consumer demand for better rates, says Ken Tumin, founder and editor of DepositAccounts.com, a website that compares CD rates around the country.
You can take advantage of this new rising rate environment and pump up your personal savings yields right now, while protecting your deposits. Here’s how:
5 Steps to Higher CD Rates
Comparison shop online at websites like Bankrate, DepositAccounts, and MoneyRates, which aggregate financial rate information. This week, Everbank, a primarily online bank, topped Bankrate’s comparison of 193 financial institutions offering one-year CDs. Its annual percentage yield (APY) of 1.42 percent beat Wells Fargo's 0.05 percent. On a $10,000 CD deposit, Everbank would pay $142 in interest in a year compared with $5 from Wells.
But be careful when reviewing search results on these sites: Banks that don’t necessarily have the highest CD rates but advertise on the sites can get top position. So scroll down the list to find possibly better rates. None of these websites includes every CD issuer, but DepositAccounts covers 6,139 financial institutions offering one-year CDs, for example.
Consider credit unions, which are included in online comparisons and were paying a quarter point more than traditional banks on $10,000 five-year CDs last December, according to the latest data from the National Credit Union Administration, the independent government agency that supervises and insures most credit unions.
Don't count yourself out over concerns you won’t meet credit unions’ membership eligibility requirements. Some are less restrictive than you think. For instance, PenFed Federal Credit Union, which is currently paying 1.26 percent on one-year CDs, is open to government employees, people serving in the U.S. military, and their families. But almost anyone can join by becoming a member of the National Military Family Association ($17 per year), which is less restrictively open to military families, their relatives—and friends. Such easier eligibility options are increasingly common, says Mike Schenk, an executive at the Credit Union National Association trade group.
Closely monitor CDs that offer high teaser rates. Some banks entice savers with high-interest-rate lures, but those can slip away if you’re not watching. Upon maturity, most CDs automatically roll over into a new lower-rate certificate, Tumin says.
Depositors have five to 20 days to close their account after their CD matures. To prevent an automatic low-rate rollover, "carefully track and manage your maturing CDs," Tumin advises.
Go longer-term for higher rates. One easy way to boost your rate is to buy a longer-term CD. Though depositors could get a 1.3 percent APY on one-year CDs at Capital One 360 this week, they could get 2.3 percent on five-year certificates. The downside is that you're tying up your money for a longer period, which can cost you lost earnings in a rising-rate environment.
The solution, says Tumin, is to "ladder" your CDs: Divide up the amount you want to save and stagger purchases of multiple five-year CDs so that one of them matures every six months. That way, you can keeping grabbing the rising rates twice a year.
Verify the legitimacy of unfamiliar banks. Those new, primarily online banks that are popping up to draw new customers are attractive. PurePoint Financial, for example, launched last month, was paying 1.4 percent on one-year CDs this week. But before you send $10,000 or more to an unfamiliar bank, you should verify its legitimacy.
"The best way to check out a bank is to call the FDIC," says Greg Hernandez, a spokesman for the insurance agency. Call 877-275-3342 and ask for a deposit insurance specialist, who can look up the bank on the FDIC's master list, which is regularly updated.
You can also do this online using the FDIC's BankFind tool. But that may give you a false negative. For example, "PurePoint is a division of MUFG Union Bank, which has been around for over 150 years," says Habis, of PurePoint. But BankFind doesn't yet verify divisions, so PurePoint can't be found there.
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