With all the
in creating new investment products, old-fashioned investments have
had to struggle to keep up with the pace of progress. Although
several banks are trying to make a once-favorite product meaningful
again, the efforts they've made thus far are too little and too
late to resurrect its ailing prospects.
Low interest rates have had plenty of positive effects on the
economy in general and on debt-burdened consumers in particular.
But one aspect of the low-rate environment has really hurt banks in
trying to lure potential customers: By making rates on bank CDs
almost negligible, customer interest in the products has all but
dried up, leaving banks having to consider fundamental changes to
the nature of CDs.
For conservative investors, the
certificate of deposit
was one of the most popular products of the last century. Nothing
could be simpler than a CD; you put your money in the bank, it
earns interest, and when it matures, you get your money back. You
can choose to take your interest in regular quarterly payments, or
you can have it reinvested and get it all out at the end.
Traditional bank CDs have some downsides, though. CDs make you
pick a time period during which your money is essentially locked
up. If you need to get at your money before the designated maturity
date, then you'll typically pay
early withdrawal penalties
-- a hit that can take away a year or more of interest payments.
Moreover, if interest rates rise in the near future -- something
that many experts have predicted for some time -- then you might
wish that you hadn't locked in a relatively low rate.
That fear of rising rates as led many investors to gravitate
toward high-yield savings and money market accounts. Right now, top
banks pay as much on these liquid accounts as they do on short-term
CDs, giving you no real incentive to lock up your money.
So in crafting the next generation of CDs, banks have pulled out
all the stops. Among the moves they've made are the following:
- Ally Financial, which is currently majority-owned by the U.S.
government along with a
) trust and other investors, now has a CD with a four-year
maturity that lets you raise its interest rate twice to match
rises in overall rates.
Bank of America
) have joined Ally in allowing penalty-free withdrawals on
) is even paying customers to open CDs, with $75 gift cards.
Same as the old boss
Coming up with gimmicks is an age-old tactic for banks. But often,
the actual value of what they're giving you doesn't overcome the
cons of opening a CD.
For Discover, which requires a $2,500 CD deposit, $75 represents
the equivalent of a 3 percentage point interest rate boost on a
one-year CD. That's certainly not bad, but as a one-time deal, it
won't solve the larger problem for savers seeking a
sustainable investing strategy
Similarly, free withdrawals don't do much good if the rates on
CDs aren't significantly higher than on savings accounts. And a
rising-rate CD still locks you into low rates as long as the
Federal Reserve chooses to hold rates at rock-bottom levels.
No, the real problem with CDs is that they simply aren't
competitive. Even top-paying banks like
) Doral Bank and
's(AIG) banking unit can't manage to pay even 2% on three-year CDs.
(SLM) offering 1.15% on an online savings account, the extra yield
from a CD just isn't worth it.
Stick with alternatives
Finding income has been a challenge for years, and bank CDs haven't
delivered the goods for quite a while. Although new bank offers may
be a step in the right direction, they're not a perfect solution.
And until they go further, they'll remain offers that you can --
and should -- refuse.
Rather than banks, some savers have decided that dividend-paying
stocks are the answer to their income needs. Stocks can be risky,
but the right ones can help you. Let the Fool's free special report
on dividend stocks get you started on the smart path.
loves banks when they treat him right. You can follow him on
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