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?“