Rising-Rate CDs a Growing Choice
Searching for a parking space at a crowded mall lot may throw a shopper looking for that last minute gift completely off.
For members and bank customers looking for safety and quick access to their money, the parking spaces these days might be far away from longer term certificates of deposit. A new Bankrate.com survey of the nation’s 50 largest credit unions and banks revealed that consumers are still skittish about CDs that lock up funds for years.
The alternative for some, the survey’s data showed, is rising-rate CDs. They tend to fall into three categories: step-up CDs, which rise at predetermined intervals during the course of the CD’s term; liquid CDs, which allow investors to transfer money out of a CD to be reinvested in higher-rate CDs; and bump-up CDs, where holders can raise their rates a certain number of times during the CD’s term.
The $5.1 billion American Airlines Federal Credit Union in Fort Worth, Texas topped the credit union list in the liquid category with its 60-month Dream Share Plan Certificate that offers an initial annual percentage yield of 2.78%. The $2.8 billion OnPoint Community Credit Union in Portland, Ore., the $3 billion San Antonio Federal Credit Union, the $6.1 billion Security Service Federal Credit Union, also in San Antonio, and the $5 billion Suncoast Schools Federal Credit Union in Tampa, Fla. also made the list.
In the step-up CD category, American Airlines FCU also made the list with several of its products. Several other credit unions were highlighted in the bump-up CD category.
“In a rising-rate environment or the cusp of a rising-rate environment, investors are very reluctant to tie up their money in longer-term CDs,” said Greg McBride, senior financial analyst at Bankrate. “So you start to see rising-rate products coming to market in an attempt to offset the objection consumers have about tying money up at a low fixed rate, only to see interest rates go racing past them.”
McBride said the rising rate CDs are not without strings. Bump-up CDs, for instance, tend to have lower initial interest rates. Account holders need to be sure they’re not trading away too much on the front end, he added. The timing of increasing the rate is also important. Liquid CDs often have conditions before the funds can moved elsewhere.
American Airlines FCU’s 60-month liquid CD doesn’t charge an early withdrawal penalty if the funds are used as a down payment on a home financed by the credit union. All of Suncoast Schools FCU’s CDs are penalty-free.
“Liquid CDs really can accomplish two goals,” McBride said. “You're not giving up too much in yield, and you get the ability to have not only competitive returns now, but the ability to capitalize on even better returns later without penalty.”
Bankrate.com said it surveyed the five largest banks and the five largest thrifts based on deposits in 10 large metropolitan markets across the country as well as the nation's 50 largest credit unions. The surveys were conducted from March 8 to March 18, 2011.