Do you have 5-year CDs maturing? I was looking back at my posts from 2008, and I noticed a few big banks that were offering good 5-year CD deals. One was Wachovia (which is now Wells Fargo). In July of 2008 it was offering a 5-year CD with a 5.25% APY. For those who took advantage of that deal, you’ll likely be very disappointed when that CD matures this month. I just took a look at the current CD rates at Wells Fargo. Its 58-month CD special has a rate of only 0.50%. Wells Fargo doesn’t list long-term standard CD rates, but it’s a safe bet that those rates are below 0.50%. The standard 1-year CD rate is only 0.05%.
Wells Fargo isn’t unique. The CD rates at other large banks are just as pathetic. Bank of America’s 5-year CD rate is only 0.40% in California. Chase Bank’s 5-year CD rate is even lower at 0.35%. Even Chase’s 10-year CD rate doesn’t top 1%. It’s only 0.90%.
When I purchased 5-year CDs in 2008, I was hoping that I would skip over the coming low-rate cycle. It worked in 2001 when rates were going down. A 5-year CD opened in 2001 matured in 2006 which was a pretty good time for CDs. It didn’t work this time.
There are no easy answers if you have long-term CDs that are maturing. I can only provide a few things to consider.
First, don’t let those CDs automatically renew. The CD grace period typically give you 5 to 15 days to close the CD without an early withdrawal penalty. If you forget about the CD and miss the grace period, the CD will likely automatically renew with a very low rate. Then you’ll have to pay an early withdrawal penalty if you want to move your money. That early withdrawal penalty may be larger than it was when you first opened the CD. Bank of America and several other banks have increased the EWPs in the last few years, and those new EWPs take effect when the CDs roll over.
Once you close the CD, you’ll need to decide what to do with that money. If it’s money that you want to keep 100% safe, you’ll probably want to keep it at a bank or credit union. Then you’ll need to decide if a CD is worthwhile today? Or does it make more sense to just keep that money in a savings or money market account?
If you’re thinking about a CD, you’ll have to decide on the best term? Short-term CDs with terms under 3 years don’t have rates much higher than the best internet savings and money market accounts. You can get a 5-year CD with a 2.05% APY at iGObanking.com (as of 7/24/13), but that rate may look very low in a few years. If rates do shoot up, you should be able to close the CD early with an early withdrawal penalty (see our CD early withdrawal penalty calculator). However, there are concerns that banks may not make early withdrawals easy.
If you don’t think CD rates are high enough to make CDs worthwhile, you can just keep the money in a liquid account. If you decide on a savings or money market account, you should consider an internet bank. You can sometimes get good CD deals at local banks and credit unions, but good deals on savings and money market accounts are less common unless they’re just a temporary promotion.
The main issue with savings and money market accounts is that rates may continue to fall. However, we haven’t seen big rate cuts in the last two years at most internet banks. So if you choose an online savings account, the rate probably won’t fall much in the next year or two even if the rate environment doesn’t improve. For this reason, I don’t see much advantage with short-term CDs with terms under 2 years.
If you’re more desperate for higher rates, a high-interest reward checking account is an alternative to savings and money market accounts. I just reviewed the pros and cons of reward checking accounts in my post Finding the Best High Interest Reward Checking Account.
I have more discussion on deciding what to do with matured CDs in my post Strategy for Getting the Best Yields in Deposit Accounts.