CDs Get Makeovers to Lift Their Image

Banks are giving traditional Certificates of Deposits makeovers to help them look attractive despite sagging yields, but regulators and analysts warn consumers to give the revamped products extra scrutiny.

“Many institutions have added innovative programs that give depositors new flexibility with CDs. Now you may be able to add money to the CD, switch to a higher interest rate or withdraw money early without a penalty. You need to look carefully and decide what makes sense to you,” said Sukari Smith, a FDIC Community Affairs Specialist, in a prepared statement. The FDIC, or Federal Deposit Insurance Corp., insures deposits up to $250,000 at member banks.

Consumers purchasing traditional FDIC-insured CDs invest money at a fixed interest rate for a set period. In return they receive a higher interest rate than that offered by a checking or savings account, but face a penalty for early withdrawals. Traditional CDs

have appealed to generations of investors seeking security and a better yield, but with interest rates at historic lows CDs have fallen in popularity. Banks are attempting to win back customers with new-generation CDs that allow for rate changes, early withdrawal and other amenities.

Ally Bank is offering a flexible “Raise Your Rate CD” that allows customers to increase rates once for a two-year and twice for a four-year CD if bank rates go up during the term of the CD.  The Bank of America “Opt Up CD” allows a one-time rate increase after six months on an 18-month CD with a minimum $10,000 deposit. The PNC “Variable Rate CD” has an 18-month term with a rate that is tied to the three-month Treasury Bill.

Ally is also offering an “Ally Ten Day Best Rate Guarantee” giving customers the best rate available in the 10 days following the funding or renewal of a CD. The Ally “No Penalty Certificate of Deposit” gives back the full balance and interest anytime after the first six days of funding a CD.

Discover Bank has teamed up with BJ’s Wholesale Club to boost business by offering a $75 BJ’s gift card for customers who open a savings, CD or money market account through Discover Bank.

Affluent investors hold 10 percent to 18 percent of their investable assets in bank deposits, including CDs, according to a December survey by MillionaireCorner. Less affluent investors – those with $100,000 to $1 million – tend to have a higher percentage of assets (18 percent) held in deposit accounts. Millionaires with $5 million to $25 million held 10 percent of their investable assets in deposit accounts at the end of the fourth quarter.

The terms and conditions of more liquid CDs can vary greatly and the products can be hard to compare. Consumers may be required to make a larger minimum investment, and are often asked to sacrifice yield in exchange for flexibility. Withdrawals may be penalty free, but limits can be put on the amount and frequency of the withdrawals. Advertised CD rates far above the competition may indicate a riskier product issued by a company that is not federally insured.

“Before you consider purchasing a CD from your bank or brokerage firm, make sure you fully understand all of its terms,” the FDIC advises. “Carefully read the disclosure statements, including any fine print.”