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Reward Checking Rates Over The Next Three Years? Switch To CDs?

Monday, June 4, 2012 - 11:49 AM
Any predictions on reward checking rates over the next three years? Are they going to get worse? Stay the same? Improve?

I am thinking of switching part of my funds to a three year CD (three year because the rates are better than 1 or 2 years, but not longer than 3 years because I think the rates will start to go up by then).

What CD length would others here consider optimal?

 
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PastTensePastTense8 posts since
Dec 16, 2010
Rep Points: 33
1. Monday, June 4, 2012 - 4:26 PM
My guess is that we will probably see some slow rate reductions and balance cap reductions in reward checking accounts in the next 3 years. That has happened in the previous 4 years, and it's likely to continue. I should also note that we will probably also see some rate reductions on internet savings accounts.

I'm hesitant to consider reward checking as a good replacement over CDs for a large part of one's savings. They can still be a good alternative to internet savings accounts.

I remember back in 2007 when State Bank of Toledo was offering a reward checking account paying 6% on all balances. At that same time PenFed was offering 6% CDs with terms from 3 to 7 years. Today State Bank of Toledo is still offering the reward checking account. However, it now only pays 1% APY on balances up to $25,000. As this example shows, a long-term PenFed CD was a better choice in 2007. It's possible that CDs may continue to be a better long-term choice for one's savings that doesn't have to be 100% liquid.

As for CD maturities, I'm hesitant to pick a term. I remember going with 3-year PenFed CDs back in 2007. I wish I had included some 5-year CDs. I remember one reader who has said that she always goes for the longest term CDs, and she has never regreted that decision. Of course, interest rates will some day rise. To hedge your bets, you may want to ensure you have CDs maturing each year for several years out in a CD ladder approach. Another strategy to consider is going with long-term CDs with small early withdrawal penalties. There are risks about depending on early withdrawal. I've discussed this strategy in this blog post.
5
Ken TuminKen Tumin5,441 posts since
Nov 29, 2009
Rep Points: 123,675
2. Monday, June 4, 2012 - 10:29 PM
Like Ken stated, one pays a dear price to be profitable in RCAs.  With 4-5 years under my belt, here are some strategies/pains:

1. Always be aware of the highest RCAs and utilize all skills to get into them.

2. Be agile to change as soon as the rate/limit drops below desired threshold; (a) move funds via checks, often through shared branches of credit unions; (b) close RCAs when not needed.  I prefer closures due to my forgetfulness (and avoid inactivity fees).  Watch out for early closure fees. 

3. Do RCAs requirements like clock work for the first few days of the qualification cycle. 

4. Avoid sharing RCA information to keep the rate/limit longer (sorry to be selfish:D).

5. Set up fraud alert (balance alert, etc.) when available.

6. Check in mid-month to ensure all requirements are met and check every 2-3 days to ensure no fraudulant activities.

7. Always be on the look out for RCA stars and be diversified (so that one rate/limit drop will impact little for my RCA portfolio).

With the above principles, I have been successful to stay on top of the RCA game; but I paid the price with added white hair and a few panic attacks.

I think it is time for me to retire from RCAs soon. 

CD is not my cup of tea since it is boring and low rate (just my humble opinion without retribution).  RCA trend: going down in both rate and limit; but one still can find several (hint hint -- credit unions) that keep a relatively higher rate/limit.  I conjecture that RCAs will still outperform savings/MM and even long term CDs for the next year or two.  I simply get burned out with RCAs, not due to lack of high rate/benefits of RCAs.

Of course, I reserve my right to change my mind when I come to the RCA decision bridge.:D
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51hh51hh1,460 posts since
Jan 16, 2010
Rep Points: 6,348
3. Tuesday, June 5, 2012 - 8:36 AM
51hh, excellent recommendations and thanks for sharing.   We can agree to disagree on #2.  If you have been actively involved with RCAs for 4-5 years, I can well understand why you might want to "declutter" and close accounts when not needed.   My experience is relatively newer, so I keep RCAs open especially if they are with a credit union and the original way of qualifying for membership (ex.:  joining an association) is no longer an option.  However, you do have to watch out for inactivity fees, as you point out.  Another reason why I keep RCAs open is that, as conditions change, what may have been "not great" in the past becomes "not bad".  In those cases, I have been able to return quickly and at times in better conditions than someone opening the account for the first time because I was grandfathered into certain privileges / caps, etc.  

I call "first dibs" on the rest of your list of strategies/plans if you decide to leave the game.  ;-)
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pearlbrownpearlbrown1,356 posts since
Nov 2, 2010
Rep Points: 5,955
4. Tuesday, June 5, 2012 - 8:57 AM
It has been brought to my attention in the past when closing a credit union CD that you can keep your membership open but have no active accounts except the required $5 or so in the savings account. That way you can always come back if you want.
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AllyAlly774 posts since
Jan 16, 2010
Rep Points: 2,257
5. Tuesday, June 5, 2012 - 9:15 AM
If you close an account and come back you would have to re-order checks for a new account--which will cost a few bucks.

But doesn't anyone else have any thoughts about my original post (which depends on the trends of Reward Checking rates vs CD rates over the next three years).

Thank you.
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PastTensePastTense8 posts since
Dec 16, 2010
Rep Points: 33
6. Tuesday, June 5, 2012 - 10:26 AM
If you close an account and come back you would have to re-order checks for a new account--which will cost a few bucks.

But doesn't anyone else have any thoughts about my original post (which depends on the trends of Reward Checking rates vs CD rates over the next three years).

Thank you.
Comparing RCA to CD is an apples-to-oranges comparison to begin with.  The former is a checking account with liquidity while the latter is basically dormant money with penalty to early withdrawal.  RCAs require tons of monthly work while CDs are for people who put the fund there for the long term. 

Your guess is as good as mine as far as RCA/CD rate trend; nobody can predict the future.  But if the current rate provides an indication, RCA rate will compare favorably with a 5-year CD for the next few years. 
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51hh51hh1,460 posts since
Jan 16, 2010
Rep Points: 6,348
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