Review and Survey of Flexible CDs

Flexible CDs can be very useful to hedge against future changes in interest rates. One example is an add-on CD that allows you to make additional deposits during the CD term. This can be useful when there's a chance that rates will fall or stay low. When there's a chance of rising rates, the no-penalty CD and the bump-up CDs can be useful. The no-penalty feature allows you to make a penalty-free withdrawal. This can be very useful if interest rates shoot up.

In theory, the bump-up (or step-up) CD also allows you to take advantage of higher rates. The bank typically allows the depositor one or two options to bump-up the rate to match the current rate of a new CD with the same term. The problem with bump-up CDs is that it depends on the bank offering competitive rates in the future.

The problem with these flexible CDs is that you typically have to sacrifice a little on the interest rate. Also, there are not many banks or credit unions offering these. A few banks have either stopped offering these or have made large rate cuts. But flexible CDs still exist, and there are a few institutions offering these nationwide. Here's a short list:

Sample of Nationwide Flexible/Liquid CD Rates as of 4/26/2010:

• Ally Bank Bump-Up & No-Penalty CDs: 1.99% APY 24-month Raise Your Rate CD (one-time bump-up option), 1.38% APY 11-month no-penalty CD
• Northwest Federal Credit Union Add-On Certificates: 1.41% APY 12-month, 1.81% APY 24-month, $500 minimum, Unlimited deposits
• Wilshire State Bank Flex CD: 1.40% APY 12-month, $10K min, $95K max, additional deposits and no-penalty early withdrawals with some restrictions (see account review)
• Choice Financial RateBuilder CD: 1.55% APY 13-month CD, $5K min, add-on deposits up to the amount of the initial deposit allowed

OneWest Bank had offered some flexible CDs several months ago, but I don't see these listed any more. Other institutions may still be offering these, but the rates are very low. Examples include Bank of America's risk-free CDs, AmboyDirect's eSavings CDs and America Credit Union's Super Bump Flex CDs.

A reader just recently commented that America Credit Union was not letting him add more to his Super Bump Flex CD. However, other readers have reported that they have been allowed to make additional deposits. There have been cases in the past when credit unions and banks have tried to change the terms of add-on CDs before maturity. The latest example is Darby Direct (which changed positions after the FDIC got involved).

While these add-on CDs have been very useful for depositors, they've been costly to banks as interest rates fell to record low levels in the last year. One of my local credit unions had offered add-on CDs for all terms. Last year they changed the policy for new CDs. Only 12-month terms and shorter can have the add-on feature. Another common way banks use to limit their exposure is to cap additional deposits to the amount of the initial deposit.

Does your local bank or credit union offer flexible CDs? Please leave a comment if you know of any. On Sunday I reported on a Maryland credit union that's offering several good deals on flexible CDs (see review).