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When Are CD Rates Coming Back Up? Part 2

Read Part 1 To “When Are CD Rates Coming Back Up?

rates going up graphAnother reason that we’re seeing such low CD rates is that banks are able to borrow from the fed at ridiculously low rates. As of October 14, 2009, banks are able to borrow from each other at .25% and directly from a Federal Reserve bank at .50%. If this is the case, why would a bank borrow from you (for example, issuing a CD) at three, four, or five percent? The fact of the matter is that they will not.

You can use this truth to gain an advantage though, even in this economy. Banks that are doing more lending need more funds from customers, as there are minimums that banks must maintain in order to borrow from the Federal Reserve, or from other banks. These healthy banks will often offer some of the highest interest rates in order to attract more deposits. Banks really make their money on lending anyway, so it’s in the best interest of these banks to offer attractive rates.

Another way to find higher rates is to look for banks that are in trouble. You can often find the highest CD rates at these banks as they are desperate to bring in more deposits in order to hedge up their losses on loans that have gone bad. Please note that I do not advocate this method. I would rather earn a lower rate and know that my money is safe and secure. However, if you know that your funds are FDIC insured and you are okay with the possibility of having to claim your funds through the FDIC in case of a possible bank failure, go for it. Like I said, you can get some of the best rates from these banks. Be aware that FDIC insurance only guarantees the principal of a CD, not the interest earned. However, if another bank buys your failed bank, you should still get all the interest you’re entitled to.

When are CD Rates Coming Back Up? Part 1

CD Rates are Low

CD Rates are Low

Recently we’ve seen CD rates hit all time lows.  There are a few reasons for this, and understanding them is going to help you structure your CDs in a way that will maximize your interest earned.

Obviously, credit is tight right now.  The minimum FICO scores for lending have increased, banks have arbitrarily cut the limits on credit cards and lines of credit, and banks are still scared to lend in this economy.

These factors coupled with the influx of TARP funds, has created a situation where some banks have too much money.  For these banks, their deposits are beginning to exceed their demand (or desire) to lend.

In response, these banks will have some of the lowest rates in order to slow down the amount of new CDs coming in.  Why would a bank do this? Banks don’t make money on CDs unless they are lending that money out.

As the economy recovers and credit loosens up, we’ll see an increase in CD rates.  In the meantime, look for banks that are located in healthy local economies.  These banks are generally doing more lending, and as a result will generally have higher interest rates on their CDs.  Grab their 12, 18, and 24 month terms.  Don’t go any longer than two years.  If things continue the way they are, we’ll see short term CDs get back around 3% by then.

Read Part 2 of “When Are CD Rates Coming Back Up?