About Ken Tumin

Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Absurdly Low CD Rates and How You Could Get Stuck with One


Absurdly Low CD Rates and How You Could Get Stuck with One

Why do banks offer absurdly low CD rates? DA member FAR asked this question in the DA discussion forum on Wednesday. That’s a good question, and it also brings up an important issue that can cost savers money if they’re not careful.

First, what is considered absurdly low? I’m sure some people may consider all CD rates in today’s environment as absurdly low. However, CD rates should be evaluated based on the current interest rate environment. One quick way I judge a CD rate is to compare it to the savings account rate at Capital One 360 (formerly ING DIRECT). This internet savings account has never been rate leader, but it has a long history of being competitive for internet savings account. It now has a rate of 0.75%. To me it doesn’t make any sense to open a CD that has a lower rate than this. That’s especially the case for long-term CDs, and that’s especially the case when the CD rate is much lower than this. In these cases, I would define the CD rate as absurdly low.

Two banks with absurdly low CD rates as defined above are iGObanking.com (a division of Flushing Savings Bank) and Bank of America. Both have 5-year CDs with a rate of only 0.35% (as of 6/14/2013). In addition, their 10-year CDs also share this same rate. Their 1-year CD rates are even lower. In this case, iGObanking.com has the highest rate of 0.15%. That’s five times higher than Bank of America’s standard 12-month CD rate of 0.03%. So if you put $10,000 into these CDs and waited a year, you would earn $15 of interest at iGObanking.com and $3 of interest at Bank of America. I think we all can agree that these rates are absurdly low.

So why do banks offer such absurdly low CD rates? One reason is that they probably have plenty of deposits to fund their loans. When banks or credit unions have more deposits than they can make use of through loans, they often invest that money in safe investments like Treasuries. So their CD rates will likely be lower than Treasury yields. Treasury yields which have recently gone up, but they’re still at historically low levels with a the 10-year Treasury note yielding 2.19% and the 5-year note yielding 1.11%.

Profiting from Those Who Are Not Careful

The absurdly low CD rates may not be just the result of the rate environment and having too much in deposits. For the case of iGObanking.com, not all of its rates are absurdly low. It’s still offering a respectable rate on its 7-year CD (1.75% APY as of 6/14/2013). That’s respectable compared to what others are offering. iGObanking.com often has a good deal on certain CD terms. However, when the deal ends, the rate plummets. It’s likely that when the “deal” CD matures, the CD will automatically be renewed into a new CD with a rate that’s no longer a deal. If the CD customers aren’t careful to close the CDs when they mature, they may be stuck with one of these absurdly low rate CDs. I wouldn’t be surprised that a sizable percentage of customers let their CDs automatically renew. In these cases, banks like iGObanking.com will do very well with CDs that cost them very little.

This shows why it’s critical not to let your CDs automatically renew without checking the new rates. In addition to the new rates, it’s also important to check the new disclosure. There may be new early withdrawal penalties or other terms that will apply to the new CD.

Banks often don’t make it easy to redeem a CD. They often make it easy to open a CD and fund it with an ACH transfer. When the CD matures, the bank may require written authorization to close the CD. Also, they may not allow an ACH transfer to receive the CD funds. DA member Pearlbrown offers some useful tips in comment #2 in this discussion forum thread about how to ensure your CD gets closed and you receive the funds.

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Anonymous   |     |   Comment #1
The other day I saw a question on DA about why Ken doesn't list Montauk Cradit Union among high rate cd givers. I celled them: They will accept anyone from anywhere  but the person must come tot the bank to open an acct. with Montauk credit unions.
Wil   |     |   Comment #2
No mention of Wilmington Trust (formerly OnBank), a division of M&T Bank? I suppose it's because CDs are no longer offered through its OnBank division, though a word of warning for current CD holders: the CDs automatically renew for a similar term at Wilmington Trust's interest rate in effect on the date of renewal. If you have a CD maturing, get out immediately and don't look back!
Shorebreak   |     |   Comment #3
Among credit unions that offer "absurdly low CD rates" is Qualtrust Credit Union, serving the DFW area and San Angelo, Texas. Their rates start at 0.15% APY for a 3-month certificate going out to a whopping 0.50% APY for a 5-year certificate. Their savings account yields 0.05% if one wants to remain 'liquid'.
Anonymous   |     |   Comment #4
soon WE will have to PAY the banks to take our deposits!
KenBDG   |     |   Comment #5
@anonymous #1, Regarding Montauck Credit Union, since late 2011 they had stopped accepting new deposits. It looks like they finally started allowing new CDs. I just called and confirmed this. I have more details on Montauck and its CDs in this blog post.
Anonymous   |     |   Comment #6
We are already doing that, sort of.  I have a substantial amount in a checking account that I very rarely use.  Well I was charged an inactive account fee because there was no account activity for x amount of time.  Now all I would have had to do was add or withdraw money from that account to avoid being penalized.  Kind of IRONIC.  All that time the bank got to use my money free and then charged me for letting them do so.  The reason for that particular account was for emergencies only, should they have occurred.
Anonymous   |     |   Comment #7
This is why I don't have any money in CDs.  Money market savings accounts pay more and can be withdrawn at any time.
paoli2   |     |   Comment #8
#7:  Where are you finding Money Market accounts paying more than 5 year CDs?  My bank is giving .01% on my saving account?  Even the brokerages have crashed on their Cash Reserve accounts.  This is why I have been sticking with 5 year CDs if I can find them as close to 2% as possible.  Thanks.
Anonymous   |     |   Comment #9
Ally Bank is paying .84% on a MMS with check writing privileges and debit card access (limited to 6 transactions per month per federal regulations).  Why tie your money up for 5 years when the interest rates are this low?

Anonymous   |     |   Comment #10
Thanks #9 but I would not want to put a goodly amount of money in a money market that is not local.  Ally does not have local branches that I know of unfortunately.  I saw some decent money market rates on Ken's list but they are not in my state, much less my city.  I'll have to stick it out with the 5 year CDs to get what I need. 
scottj   |     |   Comment #11
I can see people having CDs automatically renew at low rates at big banks but doubt it happens that much at an iGObanking or one of the others like them. People who open these are active enough to search and find these obscure deals and for the most part stay on top of things. More the people who are ok with the sub par big bank rates to begin with who don't pay attention and end up with even lower rates after maturity 
Anonymous   |     |   Comment #12
Wow. Am I glad I got one of those no-maximum 3.25% 5yr Add-On CDs about 2.5 years ago (and I didn't think it was that great a deal at the time). But I opened one up as an insurance policy (especially because you could keep adding to it with no maximum) and am thankful I did. At the halfway point now, I'm hoping that in another 2 years or so, rates will have ticked up. (And sadly of course, something like this is no longer available for new customers).

Though I still keep checking here, because my IRA CDs (different institution) will mature this summer.. and the rate environment now is absolutely terrible... so thanks for all the work you do with this site, Ken!

pearlbrown   |     |   Comment #15
Ken, thanks for the hat tip.  I have a specific series of steps I take to prepare for a maturing CD.  After 35 years in use, it has become second nature, but I still keep my "cheat sheet" handy as a reference and amend the process as needed.   

I documented the steps for a friend once, but I believe it was too detailed for their liking, and they eventually elected to either bury their money in the garden or keep it under the mattress in the Bank of SealyPosturepedic instead ;-)   

All of us who have been using CDs for a while probably follow a similar process.  This one isn't perfect, but it seems to cover the bases. 

1.  Any time I open a CD I make sure to open a checking (or savings) account at the same institution. That makes it easy to deposit the funds and to retrieve them.  My standard instructions at maturity are "redeem the CD and move the proceeds to the checking (or savings) account".  

2) I mark my calendar (ie:  do not rely on the institution's  reminder, which may/not arrive) for 6 weeks ahead of the maturity date and speak with CS to discuss a) what I need to do b) on what time schedule (ie:  by when) in order to withdraw the funds at maturity, and c) ask if there are bonus rates / renewal incentives available. 

I also ask CS at the initial conversation when the funds will be available in the share account - for example:  opening of business on the day of maturity or close of business. 

Separately, I also confirm  that my hub account link with the institution is still working OK by making a small transfer into and out of the institution  (I have linked my hub account with every institution I do business with).  

2) A month ahead of maturity I generally know what I will do with the funds, unless of course I see a significantly better rate show up on DA at the last moment, in which case I change direction. 

3) If I am asked to provide written instructions, I amend my standard CD closing letter with any specific requirement the institution might have.  However, it always includes the phrase AT MATURITY ("at maturity of CD 123456 please move the proceeds, estimated amount $xxxx to my share account xxxxxx") with AT MATURITY  bolded and in a bigger font.  It may be overkill but I like to sleep peacefully at night  ;)  without worrying that an eager CSR will close the CD early and charge me an early withdrawal penalty. 

Written instructions are sent with certified mail (the fee at the Post Office is well worth it and I ask for an Email receipt, which avoids an additional charge).  Sending it certified mail allows you to set up notifications so you can track the progress of the piece of mail and know when it arrives at your destination.  I also mark in my planner the expected date of receipt as a reminder to myself. 

4) Once I get the certified mail receipt, I wait 3 business days and then call Customer Service to confirm that they in fact have received it and processed it (generally they note the account that the maturity instructions have been received).   If no results, I wait 2 more days and if still nothing I start escalating through Customer Service.   

Every time I speak with someone I note in my planner the date, time and name of the associate as well as what was discussed and any commitments made.   If I ever have to escalate, all the detailed information is at my disposal. 

5)  A week prior to maturity date I confirm with the institution what will happen to the funds at maturity. 

6) The day of maturity I take a screen shot of my account(s) at the bank showing my overall balance(s) and compare it to my expected matured value (I calculate it independently).  Also, I do not initiate the funds transfer at my hub account until I see the funds are shown as available in the share/savings account balance in case something has not gone correctly or as expected.  In some institutions the matured funds are available at the open of business, in others not until close of business that day. 

FYI some institutions will call you (sometimes the day prior to the maturity, sometimes a lot earlier) to confirm that it is in fact you who have submitted the maturity instructions.  They will usually tell you if they are going to do this, but just in case I always ask.  If so, I make sure to have a copy of my instructions handy - they may ask to confirm the routing number, amount, etc.  I absolutely do not like this process as I refuse to disclose financial information when I am not the one initiating the call or cannot readily identify the caller as being legitimate, but there may not be another option.  Fortunately I have not run into this in a while, but wanted to mention in just in case.

Sorry for the lengthy post - I hope this helps someone and is not too confusing - and of course constructive feedback is always welcome.  
paoli2   |     |   Comment #16
Pearl:  Wow!  I thought I went to a lot of trouble concerning maturing CDs but you have me beat!  I like your idea of having them transfer it to a savings account in the same bank at maturity but how would that work if you had CDs with numerous banks all over the place?  I can see doing it for one or two but where do you draw the line with how many banks and savings accounts you would have to use?.

I have my own source of reminders for maturing CDs and I email the institutions a month prior to tell them we will be coming for the funds and not to renew.  I always ask for an email confirmation that this will be done for my proof.  As you said, we can't always rely on what they send in the mail to remember maturing CDs.  I have never had a problem with my method all these years but if you need and want the added security of certified mail then that is good too.  In my emails I always tell them that if we are not there within the Grace Period that they are to mail the check to us or transfer it to our local checking account if that is possible. 

What I don't like is that on our CDs they all state that they will renew on Maturity and I can't get them to change that.  They claim we still get the 7 or 10 day Grace Period but they must use this language in all CDs now.  This is another reason we can't forget to get the funds out during the Grace Period. 

I don't have to do your #6 (Screen Shot of balance) because we take out all the interest for use and I know the CD has to be exactly what was put in.  You evidently let yours compound so the information is helpful for you to have.

Thanks for sharing how you go about protecting your CDs.  It's always good to know other ways to do it.
pearlbrown   |     |   Comment #17
Paoli2, as I indicate in step 1 I open a checking/savings accounts at every institution.  If I use 10 different institutions, that's 10 new checking or savings accounts.  I prefer to do it at the same time as I open the CD so it can all be done within the same credit report pull. 

"Renew at maturity" seems to be the default for CDs.  I have never seen a CD which is not automatically set up to renew at maturity, and for the same term, with the exception of special-term CDs.  For example, 23-month CDs typically renew for a more conventional term (example in this case:  24 months). 

If I can send maturing instructions via the institution's secure mail feature, I print a copy of the message, but I still call and confirm that it has been received. 

paoli2   |     |   Comment #18
Pearl:  It was not clear to me that if you have 15 different banks and/or credit unions you would do this for everyone.  I would think one would have to keep a small deposit in each account for the entire term of the CD so it would not go inactive.  I must have a savings account attached to each credit union account which I always keep $5.00 in but I never bothered to do this with bank CDs.  I never really needed it with my method but each one should do what is best for them.   Thanks for clarifying that point for me.
Anonymous   |     |   Comment #20
All bank rates are absurdly low. And I have news for you folks......They will NEVER go up again. By definition.....they can't. If rates rise it will implode the debt and end life as we know it. It's over, folks. Ballgame. Done. Finito.
Anonymous   |     |   Comment #21
#20  It's nice to know we have a psychic for a poster.  I prefere to think positively that they will eventually find a way to raise savings rates at least a "bit" higher and not bomb out the economy.  If they don't they may end up having more people on the "dole" and cost the economy more.  If depositors don't loan their money to the banks, the gov will have to print more money to loan to the banks and how is that better for our economy?
CuriousDave   |     |   Comment #25
I would recommend opening a savings account rather than a checking account at each bank or  credit union where you open a CD or equivalent account, unless you don't care about your credit score or unless you stay with the same institution for all your CDs. Each time you apply for a checking account, the  institution will make a credit inquiry (commonly known as a "hard credit pull"), which will reduce your credit score, though not by much. However, if you open accounts at multiple institutions too frequently your credit score can really suffer.