Why are my bank's CD rates so bad?
July 19, 2022 8:53 AM
My bank offers a fraction of what seem like standard rates for a certificate of deposit, comparable to a high-yield savings account. Why?
Having just gotten a big (for me) check for 1099 income, I thought I'd put some of it into a six-month CD so I can make sure it's protected until I want to pay my taxes, plus get 50 bucks or so. But at my bank it seems I would earn more like 50 cents. The CD rates listed as "best" are somewhere north of 2% APY, and my bank offers 0.02%.
They can do what they want I guess, they're a bank, it's not their job to make sense it's their job to ruin the country and world. I'm just curious what the thought process is here! Why would I buy a CD at those rates? I'd be putting in a relatively small amount ($5000) but the rates don't get much better at higher deposit levels. There's still some appeal for me as a sort of money chastity belt, but surely that can't be enough to motivate most people. Are CDs a losing prospect for banks, so they want to subtly disincentivize it (or at least not incentivize it whatsoever)? Am I simply misunderstanding completely the point of buying one? I grant that my grasp of money stuff is faint at best.
Sort of can't believe I'm using a question on trying to figure out how finance people think but I guess this is how I deal with being mad I can't have fifty bucks free money.
Having just gotten a big (for me) check for 1099 income, I thought I'd put some of it into a six-month CD so I can make sure it's protected until I want to pay my taxes, plus get 50 bucks or so. But at my bank it seems I would earn more like 50 cents. The CD rates listed as "best" are somewhere north of 2% APY, and my bank offers 0.02%.
They can do what they want I guess, they're a bank, it's not their job to make sense it's their job to ruin the country and world. I'm just curious what the thought process is here! Why would I buy a CD at those rates? I'd be putting in a relatively small amount ($5000) but the rates don't get much better at higher deposit levels. There's still some appeal for me as a sort of money chastity belt, but surely that can't be enough to motivate most people. Are CDs a losing prospect for banks, so they want to subtly disincentivize it (or at least not incentivize it whatsoever)? Am I simply misunderstanding completely the point of buying one? I grant that my grasp of money stuff is faint at best.
Sort of can't believe I'm using a question on trying to figure out how finance people think but I guess this is how I deal with being mad I can't have fifty bucks free money.
May just be low-hanging fruit. The product already exists, administering it can't cost that much, if people want to lend the bank money at an absurd rate because they're extremely conservative, extremely risk-averse, or just clueless, more power to 'em!
(But this does suggest, see comment above, that they're not excessively concerned about attracting deposits right now. Which is slightly odd in an inflationary environment, but who knows. Maybe they are running up against leverage limits.)
posted by praemunire at 9:22 AM on July 19, 2022
(But this does suggest, see comment above, that they're not excessively concerned about attracting deposits right now. Which is slightly odd in an inflationary environment, but who knows. Maybe they are running up against leverage limits.)
posted by praemunire at 9:22 AM on July 19, 2022
I used to be a banker, and JohnnyGuinn is right. Some banks have more cash than they want to lend out right now. Perhaps they are afraid of default risk by new borrowers if we enter a recession. If you go to this CD rate link and enter $5k/6mo you'll see that only a few, obscure banks are offering good CD rates. The well-known names are around .2% or lower.
Your best bet in this rate environment is to buy a T-bill, which you can do through a brokerage account or directly from the US Treasury. six-month treasury bill rates are now almost 3%.
posted by mono blanco at 9:26 AM on July 19, 2022
Your best bet in this rate environment is to buy a T-bill, which you can do through a brokerage account or directly from the US Treasury. six-month treasury bill rates are now almost 3%.
posted by mono blanco at 9:26 AM on July 19, 2022
What does your bank offer for rates on their savings accounts? Most of the major banks have offered garbage rates on all their savings vehicles since 2008 on the assumption that enough people are on autopilot and will just keep doing the same thing even though it doesn't make economic sense.
The bank does not want your money right now. They have no way to offset it by lending it out to someone at a higher rate. I find that hard to believe, but that is the textbook reason. Banks are in business to make money (natch). They borrow money from depositors and the fed and lend it out at higher rates to say a mortgage borrower or a local business type loan or even to the fed in overnight transactions.
It's not just right now, CDs have been a suckers game since 2008. A high yield savings account from better banks and CUs has had better performance almost across the board since then. I have a savings account with [well known online bank] whose standard savings rate is industry leading and easily beats not only the CD rates from my brick and mortar bank but their own CD rates. The industry as a whole has basically decided that CD buyers are foolish so why not make as much money off of them as possible?
posted by Candleman at 9:43 AM on July 19, 2022
The bank does not want your money right now. They have no way to offset it by lending it out to someone at a higher rate. I find that hard to believe, but that is the textbook reason. Banks are in business to make money (natch). They borrow money from depositors and the fed and lend it out at higher rates to say a mortgage borrower or a local business type loan or even to the fed in overnight transactions.
It's not just right now, CDs have been a suckers game since 2008. A high yield savings account from better banks and CUs has had better performance almost across the board since then. I have a savings account with [well known online bank] whose standard savings rate is industry leading and easily beats not only the CD rates from my brick and mortar bank but their own CD rates. The industry as a whole has basically decided that CD buyers are foolish so why not make as much money off of them as possible?
posted by Candleman at 9:43 AM on July 19, 2022
BTW, you can get 1.05% APR for six months at Marcus (Goldman Sachs), if you don't want to trust Random Twelfth Bank of the Back End of Beyond. They have a relatively modern user interface.
posted by praemunire at 10:08 AM on July 19, 2022
posted by praemunire at 10:08 AM on July 19, 2022
CDs have been a suckers game since 2008. ... The industry as a whole has basically decided that CD buyers are foolish ...
Can you explain why CD buyers are considered foolish? It may be true that current savings accounts may yield more than current CDs (see Vio Bank), but why would that make CD buyers since 2008 foolish? Isn't it the banks that are foolish for not issuing higher-rate CDs, when banks are able to offer higher-rate savings accounts?
posted by JimN2TAW at 10:08 AM on July 19, 2022
Can you explain why CD buyers are considered foolish? It may be true that current savings accounts may yield more than current CDs (see Vio Bank), but why would that make CD buyers since 2008 foolish? Isn't it the banks that are foolish for not issuing higher-rate CDs, when banks are able to offer higher-rate savings accounts?
posted by JimN2TAW at 10:08 AM on July 19, 2022
why would that make CD buyers foolish? Isn't it the banks that are foolish for not issuing higher-rate CDs, when banks are offering higher-rate savings accounts?
If you can buy money for cheaper, why wouldn't you?
posted by praemunire at 10:10 AM on July 19, 2022
If you can buy money for cheaper, why wouldn't you?
posted by praemunire at 10:10 AM on July 19, 2022
Can you explain why CD buyers are considered foolish?
Because even the absolute best CD rates have been under what you could get with a top quality savings account. There's a certain value in locking in rates via a CD when the interest rate is 6%+, but when interest rates were literally 0.5%, locking them in for years at that rate gambling against the interest rates going to 0.25% is foolish. How do you think people that locked in next to nothing interest rate last year are feeling?
It's the same logic that keeps people investing in dividend bearing stocks because in 1990, it totally made sense to DRIP. The world, and its costs have charged, but there's money to be made from people that haven't caught up. CD buyers are those suckers at the moment.
posted by Candleman at 10:26 AM on July 19, 2022
Because even the absolute best CD rates have been under what you could get with a top quality savings account. There's a certain value in locking in rates via a CD when the interest rate is 6%+, but when interest rates were literally 0.5%, locking them in for years at that rate gambling against the interest rates going to 0.25% is foolish. How do you think people that locked in next to nothing interest rate last year are feeling?
It's the same logic that keeps people investing in dividend bearing stocks because in 1990, it totally made sense to DRIP. The world, and its costs have charged, but there's money to be made from people that haven't caught up. CD buyers are those suckers at the moment.
posted by Candleman at 10:26 AM on July 19, 2022
High yield accounts are loss leaders to attract new customers. CDs sometimes serve this role as well and you can see some of the same banks topping charts for both products on Bankrate.
posted by michaelh at 11:13 AM on July 19, 2022
posted by michaelh at 11:13 AM on July 19, 2022
Would an I Bond work? You need to hold it for a year to be awarded the interest, but... it's significant right now.
posted by Text TK at 11:15 AM on July 19, 2022
posted by Text TK at 11:15 AM on July 19, 2022
That's what we're looking into. Wish I'd known of them previously.
even the absolute best CD rates have been under what you could get with a top quality savings account.
And who is offering these 'top-quality' savings accounts in the US?
posted by Rash at 12:57 PM on July 19, 2022
even the absolute best CD rates have been under what you could get with a top quality savings account.
And who is offering these 'top-quality' savings accounts in the US?
posted by Rash at 12:57 PM on July 19, 2022
I have a savings account with [well known online bank] whose standard savings rate is industry leading
Why be coy, Candleman? Name names!
posted by Rash at 12:59 PM on July 19, 2022
Why be coy, Candleman? Name names!
posted by Rash at 12:59 PM on July 19, 2022
And who is offering these 'top-quality' savings accounts in the US?
Here's some. If you qualify for a credit union, you may be able to get better rates through them, though it may be considered a high interest checking account.
I no longer recommend Ally after horrific experiences with their customer service.
posted by Candleman at 10:28 PM on July 19, 2022
Here's some. If you qualify for a credit union, you may be able to get better rates through them, though it may be considered a high interest checking account.
I no longer recommend Ally after horrific experiences with their customer service.
posted by Candleman at 10:28 PM on July 19, 2022
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You got it right. This is not so logical on its face. They can surely lend out the money at a higher rate. Is this a local bank, a regional bank, or a behemoth like BankAmerica?
I guess they could be up against some sort of risk parameters. Maybe their loans are not performing (not paying back) and have a high at risk portfolio that they do not want to add to. Maybe they are greedy and wait for suckers to lock up for 6 months. Maybe 6 months is too short a time frame for them to make their typical loans against.
Fwiw, you could call them or stop in and ask if that is the best they can do. If you are a long time customer they may be willing to do better than advertised.
posted by JohnnyGunn at 9:18 AM on July 19, 2022