Rising-Rate CDs: Are They Right for You?

Barbara Marquand | guest writer for GoTalkMoney

With today's miniscule savings rates, you might find yourself waiting on the CD sidelines for rates to go up.

High unemployment, low inflation, a fragile housing market, and the European debt crisis are keeping interest rates low for now, but everybody knows rates will go up at some point, and no one wants a lot of cash locked up in low-rate CDs when the inevitable finally happens.

"Rising rate" or "bump-up" CDs are one answer to the dilemma. Although touted as new, these products have been around since the 1980s after deregulation removed many of the old structures dictating the types of CDs banks could offer.

Today, with interest rates in the basement, rising rate CDs are gaining attention again, and a number of banks have unrolled new products recently.

Certificate of Deposit with a Twist

Bank of America's 18-month Opt-Up CD gives you the option to increase your CD rate one time after six months, if interest rates rise during the term. Opting up to a higher rate doesn't increase the term length or carry any additional fees. The minimum deposit amount is $10,000, and the APR as of May 28 was 1%

Ally Bank's 2-year Raise Your Rate CD also gives you the chance to raise your interest rate one time during the term if rates go up. The CD has no minimum deposit amount and no fees. The CD rate as of May 28 was 1.95%.

First Midwest bank introduced its 32-Month Rising Rate CD, which gives you a guaranteed interest rate increase every eight months. The minimum balance is $5,000 and the overall APR as of May 28 was 2%. The rate starts at 1.41%, and then bumps up a fraction of a percentage point every eight months until it reaches 2.41%.

Consider Starting CD Rates

Rising-rate CDs are worth a look, but they might not be the best deal for you. CDs that let you bump up the rate often offer lower starting APRs than conventional CDs. Compare the terms of different rising-rate CDs with one another as well as with plain CDs. Remember, you're not guaranteed the bank will raise its rates during a bump-up CD's term, and you might be better off locking in a higher starting rate and staying there.

Consider other certificate of deposit alternatives to maximize returns, and weigh the pros and cons of each. A 5-year CD will offer a better APR than an 18-month CD, for instance. Of course, with a longer term, you'll run a risk that interest rates will rise and your money will be locked in at a lower rate for a relatively long period of time.

Indexed CDs, which are tied to an index, such as the S&P 500, provide the potential for higher returns than conventional CDs, but they also come with greater risks. Indexed CDs tend to have longer terms, much harsher withdrawal penalties--you can lose principal, not just interest if you withdraw early--and they don't guarantee a return. If the index plummets, you still keep all the money you invested but you don't earn anything, which means you actually lose the potential yields you could have gained had you invested the money in a conventional, albeit low-yield CD.

Certificates of deposit are more complex than they were a generation ago, with more options available than ever before. Whether you choose a standard, rising-rate or indexed CD, read and understand all the terms and conditions before you buy.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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