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Rates on certificate of deposit (CD) accounts have shifted recently in the wake of Federal Reserve policy changes — but they still offer solid returns on the right accounts. The key is choosing your CD’s term length carefully. That’s because interest rates can vary widely from one CD term to the next, and right now, the terms that offer the best rates might not be the same ones that did three months ago.
Are you looking to maximize what your money earns in a certificate of deposit (CD) account this February, before rates possibly adjust again? We asked some experts what to do (and what CD term they think is best to open now).
Start by seeing how much more you could be earning with a top CD here.
What CD term is best this February?
CD interest rates change fairly frequently, particularly in today’s evolving rate climate. Here’s what some experts think could be best if you’re opening an account this month:
Look at short-term CDs first
Historically, longer-term CDs have offered higher interest rates than shorter-term ones, but that’s not the case these days.
“Over the last few years, we’ve seen rates on the lower-term CDs surge past the longer-term, which used to be your best bet,” says Sarah Wicker, manager of deposit account and IRA services at Georgia’s Own Credit Union. “That trend has shifted from earning more the longer you lock up your funds to more attractive rates being offered on shorter-term CDs.”
The highest-paying CDs today are those under one year — and specifically those with terms of four to eight months, says Mary Grace Roske, senior vice president of communications at CDValet.com and Seattle Bank.
“According to CD Valet data, the top 10% of annual percentage yields for these terms hover around 4.5%, making them a strong option for savers looking for liquidity in the near term,” Roske says. “Standard longer-term CDs — such as 24-, 36-, 48-, or 60-month terms — currently offer lower APYs compared to short-term options, often falling under 4%.”
Explore your short-term CD account options here.
Think ahead
Rates on CD accounts are always in flux as banks and credit unions adjust to economic conditions and expected policy changes.
“To minimize interest rate exposure, CD pricing often reflects where institutions expect market rates to be over the corresponding term,” says Jennifer Oliver, president and CEO of Rize Credit Union. For this reason, understanding where rates are potentially headed can help you home in on the right term to maximize your earnings.
Right now, “The lowest rates are often found in longer-term CDs, typically anything beyond one to two years,” Oliver says. “This is because financial institutions anticipate market rates declining over time. For example, if an institution expects market rates to settle around 2.5% in five years, it might only offer a 2% rate on a five-year CD to account for this expectation.”
While there’s no way to fully predict where rates will go, the Federal Reserve just voted to hold rates steady at its January meeting. At its next meeting in March, there’s currently an 84.5% chance it keeps rates the same, according to CME Group’s Fed Watch Tool.
Just keep in mind: A lower rate on a long-term CD isn’t always a bad thing, but it depends on your goals. If you plan to keep the money untouched for a long time and will only be rolling over any short-term CD funds into a new one once it reaches maturity, then keeping them in a longer-term CD may actually earn you more interest. By the time your first CD matures, rates may have fallen significantly.
“While a one-year CD may carry a higher rate now, you have to decide if you want to take the risk of fluctuations in the rates at maturity,” Wicker says. “If there is a three- to five-year CD that is offering a slightly lower rate, it might actually work out in your favor over those few years, rather than a possible lower rate once the short-term CD matures.”
Focus on credit unions and online banks
Whatever term you decide on, it’s important to shop around. Look at CD options from several institutions — not just big-name banks.
“Large, well-known banks don’t always offer the most competitive interest rates,” says Darlene Gibson, chief financial officer at OnPath Credit Union. “They don’t need to lead the market in rates to attract customers.”
Instead, big banks tend to focus more on offering wider branch networks and additional services “rather than competing primarily on interest rates,” Gibson says.
Generally speaking, online banks, smaller banks, and credit unions tend to offer the most competitive rates, experts say.
“Credit unions are often the go-to for the best rates, as they operate on a not-for-profit model,” Oliver says. “Unlike banks, credit unions don’t face the same pressure to maximize revenue for shareholders. This allows them to offer lower loan rates and higher deposit rates, including on certificates.”
Learn more about your CD options for February here now.
