As interest rates rise, smart consumers are shopping around for the best places to stash their cash. This is especially the case for consumers with savings in brick-and-mortar banks. These banks have been slow to raise their deposit rates in the last few years of rising interest rates. As consumers hunt for higher deposit rates, they should beware of potential gotchas that could cost them money and time.
1. Existing customers often lose out on the best rates
It's common for banks to offer the best rates to new customers who bring in new deposits. Instead of raising interest rates on existing savings or money market accounts, banks will launch a new account with a rate higher than their existing account rates. This new account is marketed only to new customers. Sometimes when banks offer these new accounts, they will allow existing customers to open them. However, it's often up to the existing customer to find them.
2. Promotional CD rates will renew with much lower rates
In addition to new savings and money market accounts, banks often come out with new CDs to attract new deposits. These new CDs are often promotional CDs which have special term lengths (such as 13 months) that differentiate them from the existing standard CDs. Existing customers are usually free to open these, but banks will often require money from another bank, new money, to fund the CD.
These promotional CDs can be good deals for consumers, but consumers should be aware of their maturity dates and ensure they don't let the promotional CDs automatically renew. Most promotional CDs will automatically renew to a similar-term standard CD with a rate that will likely be much lower than the promotional CD rate. CD customers can close a CD without a penalty during a CD's grace period which starts when the CD matures and typically extends five to 15 days after maturity.
3. Early withdrawal penalty for CDs can be severe
Promotional CDs can be a good way to benefit from rising interest rates, but consumers should understand the CD's early withdrawal penalty before they open the CD. Early withdrawal penalty for CDs can be severe, and as interest rates have been rising, banks have been increasing the severity of their early withdrawal penalties.
4. Banks often don't make it easy to withdraw funds
In addition to understanding a CD's early withdrawal penalty, a consumer should also understand the options of receiving the funds from a CD when it's closed early or when it matures. Banks often don't make it easy to withdraw funds when the CD is closed. This is especially the case of online CDs. Banks will often make it easy to open a CD online and fund it electronically, but when the CD matures, the bank may not allow you to receive the funds electronically. Your only option may be to request a check in the mail.
5. With some work, consumers can benefit from rising rates
As interest rates continue to rise, opportunities for consumers to earn much more interest on their cash will expand. However, consumers will have to do some work if they want to benefit from the rising rates. Monitoring rates, shopping around and understanding the details of the banks' offers will ensure that consumers aren't left behind on rising deposit rates.
Ken Tumin is founder and editor of DepositAccounts.com, which has been tracking and rating the savings, CD and checking account offerings of banks and credit unions for more than a decade.