This Type of CD Protects You When Interest Rates Fall

This Type of CD Protects You When Interest Rates Fall
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Trying to lock into a great CD interest rate can be a frustrating experience.

Every time you find a terrific option, the Federal Reserve shifts gears and either lowers or raises the federal funds rate. As a result, your current certificate of deposit (CD) can become either more competitive in the marketplace, or less so.

For example, if you have a traditional CD and the Fed lowers rates — which it might do again when it meets Oct. 29-30 — your CD is likely to become more valuable, as it will probably earn a higher return than new CDs offered in coming months.

But when the Fed eventually raises rates again — as it inevitably will at some point in the future — being locked into a CD interest rate can mean earning a lower rate than what you would get on a new CD.

Is your head spinning yet? If trying to keep up with the Fed is a frustrating and confusing experience, you can avoid being locked into one rate over a long period by purchasing a no-penalty CD.

When you buy this type of CD — sometimes called a “breakable CD” — you can exit your commitment at any time without paying a penalty. So, for instance, if you have a CD with a five-year term, you can withdraw your money from the CD at any point before that five years has elapsed and not owe a penalty.

By contrast, if you own a traditional CD, you will have to pay a penalty — typically equivalent to several months of accumulated interest — if you withdraw money from the CD before its term is over.

Several banks currently offer no-penalty CDs, including:

Unfortunately, there is a downside to no-penalty CDs: They typically earn a lower interest rate than CDs that do not offer a no-penalty option.

Also, you might find savings accounts that offer an interest rate as good as — or maybe even better than — what some no-penalty CDs offer. So, compare savings account rates to those of no-penalty CDs before plunging into the latter.

You can use a free online resource like Money Talks News’ savings account search tool to view interest rates from multiple banks in one place.

Have you ever purchased a no-penalty CD? Share your experience in comments below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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