How Are CD Interest Rates Determined?
A certificate of deposit (CD) is essentially an agreement between you and the bank. You agree to deposit your money in the bank for a fixed amount of time and, in return, the bank guarantees you a specific CD interest rate.
CD interest rates are typically determined by three factors:
1) The length of time until your CD matures (typically, anywhere from 3 months to 10 years).
2) The current interest rate environment (e.g., how much other banks are willing to pay on deposits).
3) The expected rate of return (how much your bank anticipates it can earn with the money you have deposited by loaning it to other customers or purchasing investments).
Getting Higher Interest Rates
In most cases, you'll receive higher CD interest rates if you increase the length of time your funds remain on deposit or increase the amount of your deposit.
Here are some basic guidelines to follow when choosing the term of your CD:
Determine how long you are willing to leave your money untouched. Look for the best CD interest rates available within this timeframe.
If interest rates are expected to rise in the near future, consider a shorter-term CD so that you're not locked into low yields while rates increase.
If CD interest rates are flat or expected to decline, consider choosing a longer-term CD to lock in a better rate.
Watch the "Gotcha"
CDs typically come with early withdrawal penalties, which can wipe out returns on even the best CD interest rates if you need to take the money out before the term is up. So, make sure the maturities you select work with your cash needs.
Discover
Discover offers a full range of CDs and IRA CDs with terms from 3 months to 10 years as well as Money Market and Online Savings Accounts. Open an account online in minutes at DiscoverBank.com or call our 24-hour Customer Service at
1-800-347-7000.
Legal Disclaimer: The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.
