Federal Reserve rate hikes, such last week’s one-quarter percentage point increase, can lead to higher interest rates on certificates of deposit, or CDs. Annual percentage yields on CDs at many online banks are closing in on 3 percent after the Fed’s last few hikes.
If you own a CD — often called a share certificate by credit unions — here’s a look at what the most recent rate increase means for your savings.
Seek out higher rates. The longer a CD’s term, the higher the rate; most financial institutions offer terms of up to five years. In recent years, CDs with five-year terms have had average APYs well below 1 percent. That’s changing at a number of online banks and credit unions as yields push toward the 3 percent mark.
Although Fed rate hikes don’t cause bank rates to skyrocket overnight, they can encourage financial institutions to gradually increase their APYs. Why? Banks want to remain competitive and attract potential customers. You will pay an early withdrawal fee if you close a CD before the end of its term, also known as its maturity date, and move the money to another institution with better rates. The penalties you will incur might nullify any gains. You could, however, open a new CD at another financial institution.
Ask for a bump-up if rates increase. Some financial institutions offer bump-up CDs, which let you request a rate increase if your bank’s rates go up. In most cases, you can exercise this option only once during the term of your certificate. These types of CDs typically have lower interest rates than fixed-rate certificates, and many carry steeper minimum deposit requirements.
Another option: step-up certificates. If you want a savings product that functions much like a bump-up CD but with more predictable rate increases, consider a step-up CD. These have interest rates that automatically increase at specific intervals. With a 28-month step-up CD, for example, you might start with a low APY, but your rate will rise every seven months.
Again, initial interest rates on these products tend to be low, and some of these CDs and share certificates are “callable.” That means you might never see the rate boost because the issuer might redeem yours before it matures.
Watch CD rates. Although each individual Fed rate hike might not lead to dramatic changes, it’s still a good idea to monitor your bank or credit union’s response and compare it with those of other banks and credit unions.
Tony Armstrong is a writer at NerdWallet. E-mail: firstname.lastname@example.org. Twitter: @tonystrongarm.