Best Bank Accounts for a Future of Uncertain Interest Rates

The last 5 years have been painful for anyone with a high-yield savings account. Rates have fallen each of those last 5 years, and they continue to fall. If the Fed keeps to its late-2014 "commitment" of exceptionally low rates, we may continue to see savings account rates continue their slow decline. However, there are concerns that inflation will eventually force the Fed to hike rates, and when that happens, rates could shoot up quickly.

Long-term CDs can help slow the rate cuts. Once you lock into a CD, you don't have to worry about a rate cut until the CD matures (or, in rare cases, until a bank failure). You can reduce the risk of being stuck in a CD when rates rise by choosing CDs with mild early withdrawal penalties. My last review of this strategy was in my May 8th post. If you don't want to lock your money into CDs and worry about early withdrawal penalties, you may want to consider flexible CDs with special features that can protect against changing rates.

Ally Bank's CDs That Help You Manage Rising Rates

CDs are beneficial when rates are falling due to their rate locks. You don't have to worry about lower rates until the CDs mature. However, that feature becomes a disadvantage when rates rise. The small 60-day early withdrawal penalty of Ally Bank CDs reduces this problem. If you don't want to depend on an early withdrawal, Ally Bank has two special CDs that can reduce the problem of being stuck in a CD when rates are rising.

Ally Bank's No Penalty CD

The first Ally Bank CD that can be useful if rates rise is the 11-month No Penalty CD. This allows the customer to close the CD without a penalty anytime from 7 days to 11 months. No accrued interest is lost. If rates go up and you find a better deal during those 11 months, you can close the CD without any loss.

One minor downside to this No-Penalty CD is that it can take a couple of days between your request to close the CD and the time the money becomes available. I described this in my Ally No Penalty CD review.

Another downside to Ally's No-Penalty CD is a low rate (0.91% APY as of 5/29/2012). However, its rate has remained higher than the rates of most internet CDs with terms under one year. Also, it has a higher rate than Ally's regular 3-, 6- and 9-month CDs. The only reason I can think of why anyone would choose these CDs over the No Penalty CD is to take advantage of Ally Bank's CD renewal bonus program.

Ally Bank's Raise Your Rate CDs

Another Ally Bank CD that can be useful if rates rise is the Raise Your Rate (RYR) CDs. These CDs allow you to bump up the interest rate to the current Raise Your Rate CD if interest rates rise. The 2-year CD has one bump-up option and the 4-year CD has 2 bump-up options. I have more details of these CDs in my Ally Bank Raise Your Rate CD review.

These RYR CDs can help reduce worries of being locked into a low-rate CD when interest rates start going up.

One downside to these RYR CDs is the low rates (1.09% APY 2-year & 1.45% APY 4-year as of 5/29/2012). These are competitive compared to internet CDs with comparable terms at other banks. Nevertheless, they are much lower than what you can get with long-term CDs (see my last CD rate survey).

Another possible downside is the risk that Ally won't keep these rates competitive if rates start to rise. If that happens, the bump-up options will provide little benefit.

There's another risk that some may be thinking about more since the news of the bankruptcy of Ally Financial's mortgage unit. In the rare possibility that Ally Bank fails, what will happen to these CDs? My guess is that the FDIC will have another bank assume all deposits. However, the new bank may choose to lower the rates and change the features of these CDs. If they do make such changes, you'll be able to close the CDs without any penalty. For this possibility, you would have been better off with Ally Bank's 5-year CD which has a higher rate than these RYR CDs.

CIT Bank's CDs That Help Manage Rising and Falling Rates

CIT Bank has two special CDs called Achiever CDs with 1-year and 2-year terms. These give customers one chance to make an additional deposit of any size and one chance to increase the rate to the current Achiever CD rate. These have the same bump-up feature as Ally's Raise Your Rate CDs. This can be useful if rates rise. The Achiever CDs have the additional benefit of an add-on deposit option which can be useful if rates fall.

As I described in my CIT Bank Achiever CD review, I think the 2-year CD has the most value since the add-on deposit feature is most useful for longer terms. If rates fall (like they have been over the last 5 years), you can always fall back on this Achiever CD. In that case an additional deposit into the Achiever CD will likely be better than opening a new CD with a similar maturity date.

Just like the Ally Bank CDs, the downside to these CIT Bank Achiever CDs is low rates relative to the best 5-year CD rates. However, the Achiever CD rates are very competitive compared to 1-year and 2-year CD rates at other internet banks (1.10% APY 1-year & 1.25% APY 2-year as of 5/29/2012). They are also very competitive compared to CD rates at all-access credit unions.

One downside with CIT Bank Achiever CDs is a large minimum deposit of $25,000.

Just like Ally RYR CDs, another possible downside is the risk that CIT Bank won't keep these rates competitive if rates start to rise. If that happens, the bump-up option will provide little benefit.

The add-on feature can be useful as rates fall, but there is a downside if rates keep falling. A new long-term CD can be a better choice than an add-on deposit. When the add-on CD matures, you may have wished you had invested in a long-term CD when rates were higher rather than making that add-on deposit.

I have a personal example of this potential downside with add-on CDs. In early 2008 I opened a 5-year add-on CD with a 4.65% APY at my local credit union. This allowed multiple add-on deposits with no limit on the size of the deposits. I've made good use of this CD in the last two years. However, the CD will mature in 2013, and interest rates will likely be lower than they are now. It may have been better in the long run if I had opened new long-term CDs rather than making those additional deposits into the add-on CD.

Bottom Line

These flexible CDs won't be better than long-term CDs if rates continue to stay low. However, if rates do shoot up in the next year or two, they may do better. Based on the Fed and the current state of the economy, my guess is that we won't see higher rates until after 2014. However, no one can be sure about future interest rates.

If you want to have even more flexibility than these CDs and still want some protection against falling rates, there are some savings and money market account promotions that offer rate guarantees. I keep track of these in my weekly rate reviews.