CreditCardsAct

How CD Rates Work

Are short term CD rates as good as longer term CD ones or better?

Sometimes shorter term rates pay a better APY than longer term CD’s, although you expected the opposite.

It seems right that CD rates with a longer term should be better. In most cases it’s so. Short term CD rates as well as long term CD rates are less liquid than savings account, that’s why they are higher. You know that you can get a better CD rate on a longer commitment in case the interest rate never changed.

What will be if interest rates change? If the banks feel that interest rates in general are a bit high, they must believe that rates in general will be lower in the future. They will signal this by keeping long term CD rates relatively low.

A Surprising Trend

For example you have a 6 month CD with a decent rate. You’d expect the 12 month CD rate to be higher– perhaps it’s another 0.3%.The 18 month CD rate could be about 0.7% higher than the 6 month CD rate. The banks keep CD rates relatively flat if they think that rates might go down. In our example you might have the 12 month CD paying only 0.1% more than the 6 month CD. The 18 month CD rate or even 2, 3, and 5 year rates might be like 12 month CD rate or even lower.

You’re getting the same rate without locking up your cash, so you can buy the shorter term CD. If rates go down you’ll be forced to buy into lower CD rates. It would have been better to lock into the longer term CD when your short term CD matures.

Buying in Uncertain Times
Of course nobody knows whatCD rates are going to do. Pick your terms accordingly to the time and energy you want to spend. Find acceptable CD rates in that ballpark because only you know how long you can tie your money up.

Lean toward the longer terms if you think rates will go down or stay the same. In case you think rates will go up, lean toward shorter term CDs or money market funds. You should be sure that CDs will be the right choice for you and your money for many years.