Up, up and away: As the Federal Reserve has raised interest rates to combat inflation, CD rates have reached—and surpassed—the 7% milestone. As of September 20, a credit union in Michigan is offering a CD with a annual percentage yield, and other offers aren’t far behind.
Rates on certificates of deposit have been heating up all over, with several banks and credit unions now offering APYs in the 5% and 6% ranges. But is there a catch? Is snagging the highest possible CD rate always your best move?
That depends on the restrictions and limits that may go along with the high rates.
“You have to understand the fine print because a CD is not the same thing as a savings account,” says Corbin Blackwell, a senior financial planner at Betterment, an investing and saving app. “You can’t take that money out [early] and, at the same time, get the full 7% rate.”
Where Are the Best CD Rates?
Some of the hottest CD rates right now are at credit unions, where CDs are generally referred to as share certificates. In addition to the seven-month certificate earning APY at Alpena Alcona Area Credit Union in northern Michigan, Signature Federal Credit Union offers a APY on a three-month share certificate, and Colorado’s Ent Credit Union has a rate available on an 11-month term, as of September 20.
All of these rates are well above the national averages of 0.21% for a one-month CD and 1.76% for a 12-month CD as of September 18, according to the Federal Deposit Insurance Corp.
Related: The 10 Best CD Rates
What To Know About Chasing the Highest CD Rate
A financial institution that offers an eye-popping rate is typically in need of more deposit dollars to fund loans, says Jill Castilla, president and CEO of Citizens Bank of Edmonds in Oklahoma.
“What you’re seeing is, as banks and credit unions have less accessibility to liquidity to fund loans and other investments, they’re having to pay more for those deposits,” Castilla says.
But financial institutions don’t like to lose money, so they will often place limitations on their highest rates, such as balance restrictions or stiff early withdrawal penalties. And when an institution offering a high CD rate is a credit union, you’ll first have to qualify for membership before you can take advantage of the offer.
Here are five of the most common items to check in your CD fine print before handing over your money.
1. Check Balance Minimums or Maximums
Most CDs have a minimum balance, but some banks or credit unions also include a maximum amount, especially if they are paying high interest.
Alpena Alcona Area Credit Union’s -yielding CD, for example, has a minimum balance requirement of and a maximum of $7,000. Some banks and credit unions have minimum balances starting around $100 to $300, but it’s more common to see minimums starting in the $500 to $1,000 range.
Related: How Much Money Should I Keep In A CD?
2. Be on the Lookout for Penalties
Banks and credit unions generally charge a penalty for withdrawing funds before a CD’s term ends. This is especially the case if the APY is high. Withdrawing early will reduce your ability to get the full return.
Signature Federal Credit Union, Alpena Alcona Area Credit Union and Ent all have early withdrawal penalties. Many other credit unions, banks and online banks do as well.
3. Be Clear on Whether It’s a Fixed or Adjustable Rate
It’s important to find out whether the APY is fixed for the life of the CD or whether the rate is adjustable, meaning it may change throughout the term based on market rates.
An adjustable-rate CD might start at, say, 6.00% APY when you sign on, but then drop when market rates fall.
“See what the rate structure is … if it is an adjustable or variable rate, see if there is a ceiling that’s put in place,” says Blackwell. “Because that would restrict your ability to ride rates up,” and you’d be doing the bank “the favor to be able to reduce your rate.”
Related: CD Calculator
4. Check Whether the Offer Is Limited to Certain Customers Only
Sometimes a financial institution offers a higher rate to attract new customers. For example, Ent’s APY on an 11-month certificate is a limited-time offer. To earn the promotional rate, you must make a “new deposit,” which Ent defines as money that has been “transferred (not pending) from another financial institution” within a week before opening the CD.
This rate helps bring in new deposits, which can help the institution make more loans, while the limitations prevent existing customers from simply moving around funds.
You should also check whether you qualify to join the credit union offering that attractive CD rate. Credit union applicants generally must fit certain requirements, such as living in the geographic area where the credit union has branches or having a certain type of job, such as being a teacher, medical professional or member of the military.
5. Make Sure the CD Is Federally Insured in the Event of Failure
It’s critical to make sure the money you stash in a CD has deposit insurance from a federal agency. That way, even if your institution fails, your money will be safe.
Banks are insured through the Federal Deposit Insurance Corp., while credit unions get insurance through the National Credit Union Administration. The insurance covers up to $250,000 per account.
Typically, the institution will display its federal insurer on its website and at its branches. But you can verify whether it’s covered by looking up the institution’s name on the federal regulator’s website.
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