This Type of CD Protects You When Interest Rates Fall

Woman with piggy bank
Photo by F.Schmidt / Shutterstock.com

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.

Most Popular
New Retirement Bill Would Help Savers of All Ages
New Retirement Bill Would Help Savers of All Ages

With bipartisan support, this bill could help millions of workers and retirees boost or conserve their retirement savings.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

This iconic dinnerware is prized for everyday use as well as reselling for profit.

3 Colors That Can Ruin Your Car’s Resale Value
3 Colors That Can Ruin Your Car’s Resale Value

Select the wrong color for your next car, and it could depreciate twice as fast as others.

20 Things That Are Actually Worth Stockpiling
20 Things That Are Actually Worth Stockpiling

You don’t need a year’s supply of toilet paper to survive an outbreak, but consider stocking up on these items.

9 of the Best Things to Do When You Retire
9 of the Best Things to Do When You Retire

You’ve waited all your life for this moment. Make the most of your retirement.

Beware This Hidden Ingredient in Rotisserie Chicken
Beware This Hidden Ingredient in Rotisserie Chicken

Something foul may lurk in those delicious, ready-to-eat birds.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.