There are a lot of downsides to high interest rates. But one of the few perks is that CD rates are also high. And right now, the best CDs have APYs of about 5%, which is downright remarkable given the lows of the last decade or so.
With the Federal Reserve having recently announced a half-point federal funds rate cut, you may be thinking that now is the time to lock in a high APY. However, not everyone should run out and open a new CD. For some folks, CDs just aren’t the right move.
Here are a few signs you should stay off the CD bandwagon.
1. You have high-interest debt
If you’re carrying around high-interest debt, the best investment you can make with your money is to pay off that debt. What counts as “high interest” here? Essentially, any rate that’s higher than you would get from a CD.
For example, suppose you have $5,000 to spare. You could use that money to pay off your $5,000 in credit card debt with a 20% APR, or you could invest in a 12-month CD with a 5% APY.
If you invest in the CD, you’ll earn around $250 in interest when the CD matures after a year. But that high-interest debt will have accrued over $550 in interest. So you’d actually lose more than $250 by investing in the CD instead of paying off your credit card right away.
2. You might need the money soon(ish)
Even if you’re debt-free, you may not want to put your savings into a CD. That’s because CDs tie up your money until they mature. If you need to take your money out of a CD before it matures, you’ll get hit with a big fee.
Some CDs have early-withdrawal penalties equal to all of your interest earnings. Even if you only lose a few months’ worth of interest earnings, your effective APY would be slashed well below what you’d have earned otherwise.
You can minimize this risk by sticking with short-term CDs. For instance, six-month CDs have great rates right now and only tie up your funds for half a year. If even that could potentially be too long to go without access to your money, skip the CD entirely.
No-penalty CDs exist, but the rates are lower
Some banks may offer no-penalty CDs, which are CDs that don’t charge early-withdrawal penalties. While this sounds great in theory, in reality, the interest rates are terrible — as in, below the already-low average of 1.8% for six-month CDs.
In fact, it’s actually closer to the national average for regular low-rate savings accounts.
I’ve seen no-penalty CDs with APYs as low as 0.05%. Inflation would eat your savings alive at that rate.
Put your emergency fund here instead
If you want to keep access to your money but still want it to grow, just look for a high-yield savings account. The top savings accounts offer rates in the same 5% range as the best CDs, so you won’t lose out on much earning potential.
Folks who want even quicker access to their money should check out high-yield money market accounts. Competitive money market accounts will have similar high rates to CDs and high-yield savings accounts, while offering ATM access and/or check-writing capabilities.
3. You have better investment opportunities
Another reason you may wish to skip the CD craze is because you simply have better investing prospects. Your retirement, for instance, if you aren’t already maxing your IRA or 401(k) contributions, you may be better off putting the money there instead of picking up a CD.
If you have the ability to put that money into purchasing a home, that could also offer a better return in the long run than a short-term 5% CD. (Your mileage may vary; the housing market is kind of crazy at the moment.) Similarly, small business investing is growing in popularity as a mid- to long-term investment.
CDs can offer a relatively low-risk way to keep your savings growing faster than inflation, especially right now when rates are so high. But they’re not for everyone. Make sure to consider the pros and cons, as well as your other options, before investing your money into anything, CDs included.
