Saving Tip: Keep an Eye on CD Due Dates


NEW YORK (MainStreet) — Attention savers: Keep a close eye on the expiration dates for your CDs, or else you could get locked into a new and stingy deal, and miss out on the bigger yields that might be coming in 2011.

The nice thing about certificates of deposit is you don’t have to think about them very much. Once you buy one, the yield is typically fixed for the full term. You don’t have to pay close attention to the financial markets because your CD is federally insured against loss, and the interest earnings roll in like clockwork.

Still, CD owners face moments of decision from time to time, such as what to do when a CD’s term ends. Unless you’re going to spend the money or invest it differently, the choice usually comes down to an array of CD options.

You can get a CD with a shorter term, or a longer one. Or you can shop around for a better deal from another bank.

And then of course, you can do nothing. What happens next is spelled out in the CD terms, but typically the bank will automatically reinvest your money in a similar CD at whatever yield it currently offers. If you’d had a 12-month CD, you’d get a new 12-month CD, with a rate that could be higher or lower than what you’d earned over the previous year.

While automatic reinvestment is convenient, the result may not always suit the saver’s best interests. The risk can be especially high today because the interest-rate landscape is changing. Long-term rates on investments like 10-year U.S. Treasury notes have risen to about 3.3%, up from about 2.4% in early October, as investors bet that economic recovery will spur inflation.

At the same time, short-term yields have stayed rather low, thanks to the Federal Reserve, which has more influence on short-term rates than long-term ones.

The result is a “steep yield curve,” when savers and investors get especially large rewards for locking their money up for longer periods.

For now, the jump in long-term Treasury yields has yet to cause any dramatic increase to CD rates, but CDs could become more generous over the coming months. If you had a five-year CD coming due today, it might be wise to put the cash into accessible, short-term savings, rather than lock into a new five-year CD at today’s still-low yields, averaging about 1.58%, according to the BankingMyWay survey.

After a CD comes due, the bank typically allows a seven-day grace period for the saver to notify the bank that he does not want his cash automatically rolled into a new CD. Before or during that period, you can put a halt to the reinvestment, giving yourself as much time as you need to decide what to do.

Even if you want to put your money into a new CD with the same term, it can pay to use the BankingMyWay shopping tool to look for a more generous CD offer.

On a percentage basis, long-term CDs are far more generous than short-term CDs and bank savings. While the five-year CD pays 1.58%, three-year CDs average only 0.218%, and money market accounts only pay 0.251%. Nonetheless, the five-year CD produces paltry earnings of just $158 a year for every $10,000 invested. It could make sense to give that up and keep your cash available for a more generous offer in a few months.

Before settling on a new CD, look at the penalty for early withdrawal. Typically, penalties range from loss of three months’ interest for three to 12-month CDs, and loss of six months interest for ones with longer terms.

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