When Do CD Rates No Longer Matter?

CD ladders can be a good way to invest in CDs. In a typical CD ladder, when a CD matures, you roll that into a long-term CD with the best rate you can find. I reviewed this strategy in this post. Many savers stick with 5-year CDs. In today's environment, some have increased the terms of the CDs in their ladders to 7 and 10 years to maximize their interest.

Poll Question

If CD rates keep falling, is there a point in which CD ladders no longer make sense? That leads me to today's poll question. When one of your CDs matures, how low of a CD rate would it take for you to keep that money in a liquid account instead of rolling it into a new CD? For example, if the best long-term CD rate you can find is only 1.00%, would that be so low that you would just move the money into a savings or checking account?

CDs vs. Savings Accounts

I hope we don't face this situation, but with the Fed's late-2014 pledge, it's possible that CD rates will continue to fall. A few internet banks already have unbelievably low 5-year CD rates. For example, the 5-year CD APY at iGObanking.com is only 1.10%. ING Direct's 5-year CD rate is even lower with a 1.00% APY (as of 1/31/2012).

The two reasons to purchase a CD rather than putting that money into a liquid account is a higher interest rate and a rate that's guaranteed not to fall until maturity. As CD rates fall, those two advantages become less important.

I reviewed a similar issue with savings accounts last year. In my last year poll, I asked when do savings account rates no longer matter. In the poll, 60% of the readers who responded said rates of 1.00% (or higher) were too low. As I described in that post, when rates are so low, the extra amount that you could earn by moving your money to another savings account may be too small to make the effort worthwhile.

The main issue with CDs isn't the effort to open a new account. It's locking your money into a low rate for a long period of time. A mild early withdrawal penalty can reduce this problem, but there are still potential risks. I have more details in my post, What to Do with Maturing CDs? Choosing the Best New Long-Term CD.

For those who want to keep the money 100% safe with no risk of principal loss, the main alternative to CDs is a liquid account like a savings or checking account. If you had a 5-year ING Direct CD maturing today and you wanted to keep your money with ING Direct, I think most savers would choose ING Direct's savings or checking account instead of a new 5-year CD with a 1.00% APY. Currently, ING Direct's savings account pays 0.80%. That CD rate isn't high enough to make up for the loss of liquidity in my opinion. However, it should be noted that the savings account rate may be much lower next year. That doesn't help make the CD much more attractive. Even if the savings account rate falls to 0.40%, that 1.00% CD doesn't look much better. In short, I think there's a CD rate so low that most everyone will choose the liquid account over the CD.

I'm Not Giving Up on CDs Yet

In my opinion, we have not reached the point where CD rates don't matter. Certain long-term CDs can still make more sense for safe money than keeping that money in liquid accounts. I reviewed using CD ladders with the highest CD rates in this post, and I reviewed choosing long-term CD rates with mild early withdrawal penalties in this post.

For savers with CDs maturing over the next year, CIT Bank's 2-year Achiever CD can be useful. If CD rates continue to fall, you can always fall back on this CIT Bank 2-year CD which allows for a one-time add-on deposit. I have more details in my CIT Bank CD review.

Searching for the Best CD Rates

To search for the best nationwide CD rates and the best CD rates in your state, please refer to the CD rates section of DepositAccounts.com.