Incredible Bank's New 1-Year CD and the Problem with 1-Year CDs

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• All 1-Year CD Rates are Low
• 1-Year CD vs. Checking Account

Incredible Bank is again offering an internet CD. Compared to the internet CD they offered last June, this one is far less incredible. This new one has a 1.30% APY for a 1-year term. Minimum deposit is $10,000, and the maximum is $225,000 (in one or more CDs). More CD details are listed at the bottom of the bank's FAQ page. The rate is listed in the bank's Open An Account page as of 12/27/2010.

All 1-Year CD Rates are Low

I'm afraid a 1.30% APY for a 1-year CD is fairly competitive and on par with Discover Bank and Sallie Mae Bank. You can get a higher rate at internet banks Bank of Internet USA which is offering a 1.41% APY for a 1-year CD with a $1K minimum deposit and CNB Bank Direct which is offering a 1.50% APY for a 1-year CD with a $25K minimum deposit. These rates are accurate as of 12/27/2010.

1-Year CD vs. Checking Account

It might seem strange that Incredible Bank's internet checking account has a higher rate than its 1-year CD. The checking account is paying 1.35% APY on balances of up to $250K as of 12/27/2010. I have more details of this checking account and Incredible Bank in this November review.

One reason to open the CD is if you want to protect yourself from more cuts in checking and savings account rates. How much would you lose out? Let's assume that a year from now the Incredible Internet checking account rate is half of what it is now (0.675%). You can approximate the interest earned in this checking account by taking the average of the current yield (1.35%) and this assumed yield (0.675%). That comes out to 1.01%. That's 29 basis points less than the CD. For a $10K deposit, that's $29. So under this scenario, you would earn $29 more in the CD than in the checking account. That's not much of a gain for giving up the liquidity of a checking account. It's also important to note that the $29 could be much less if rates don't fall as much as anticipated in this scenario.

As you can see, it's hard to argue for a 1-year CD in this environment. An approach that could do better is going long on CDs with mild early withdrawal penalties. I reviewed these issues in my post last week on Strategy for Getting the Best Yields in Deposit Accounts.