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Why Today’s Experts Recommend Short-Term CDs Over Long-Term Ones

Lock yourself into a long-term CD now and you might miss out on higher interest rates later.

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Certificates of deposit (CDs) have the potential to be a good addition to your cash investment strategy. Since CDs tend to earn interest at a higher rate than the average savings account, these deposit accounts can make a good temporary home for your savings. 

Once you decide to look into these low-risk savings vehicles, the next step will be to find the best CDs for your savings goals. While there are clear benefits to both short-term and long-term CDs, current advice from economic experts suggests that currently, short-term CDs are likely to be a safer choice than long-term CDs at this point in time.

Read on to learn how Fed rate hikes can influence CD rates and why you’ll want to consider these details when you’re deciding between a short-term or a long-term CD. 

Why Today’s Experts Recommend Short-Term CDs

Traditionally, Banks tend to offer higher annual percentage yields (APYs) for long-term CDs. The reasoning behind this is that if you agree to leave your cash in a CD for a lengthier period, you can earn a higher interest rate on your savings. 

However, at present numerous experts recommend leaning toward short-term CDs rather than long-term CDs due to the possibility of further interest rate increases from the Federal Reserve.

Inflation has hit record numbers in 2022 with Americans facing higher prices on everything from gas and groceries to rent and insurance. In an effort to curb inflation, the Federal Reserve (aka the Fed) has raised its benchmark interest rate (aka the federal funds rate) six times so far in 2022 (as of November). After the latest rate increase, Fed Chair Jerome Powell indicated that future rate increases may be still coming. 

While CD interest rates are not directly tied to the federal funds rate, when the federal funds rate goes up, banks tend to increase the rates they offer customers on CDs, savings accounts, high-yield savings accountsmoney market accounts and more. 

The Fed has announced that future interest rate increases are likely on the horizon. Many economic experts agree. So, there’s a good chance that interest rates on CDs may increase in the future too. 

By opting for a long-term CD, you might get stuck with a fixed-rate APY that doesn’t remain competitive as the Fed continues to increase interest rates. For example, if you agree to a five-year CD now but more attractive interest rates become available in the coming months, you could miss out on potential interest earnings over the next several years. 

Saving in Uncertain Times

To get the full potential value out of a CD, you must agree to leave the funds you deposit in the account alone for a set period of time, as is dictated by the CD’s term length.

If you make an early withdrawal before your CD reaches maturity, your bank might charge you an early withdrawal penalty. The fee could offset (and sometimes wipe out) your interest earnings. In extreme cases, you could actually end up losing money due to early withdrawal fees. This defeats the purpose of using a CD in the first place. 

One of the first details you need to consider when you’re deciding on the type of CD to open is how soon you will need to access the funds. If you’re saving for a bigger goal that will take you several years to reach, then a long-term CD could be a good option. But if you need the ability to withdraw the funds sooner, a short-term or no-penalty CD might be more appropriate for your needs.

It’s also wise to think about whether you can definitely go without the money you’re placing in your CD for the duration of its term length. If you feel like you’ll need to dip into it in the event of an emergency, you might be better off considering a no-penalty CD, as these allow you to make full or limited withdrawals without penalty. 

Offer Details

Secure application on issuer’s website.

CIT Bank No Penalty CD
APY: Up to 3.65% APY
Minimum Opening Deposit: $1,000
Features:
No early-withdrawal fee
Daily compounding interest
No account opening or maintenance fees
FDIC insured

Current CD Rates

The APY you earn on a certificate of deposit can vary widely. Below are the major factors that can influence your interest rate: 

  • Financial Institution: Online banks and credit unions tend to offer the highest APYs.
  • CD Type: e.g., jumbo CD, no-penalty CD, etc.
  • Term Length: As mentioned above, long-term CDs typically (but not always) feature better rates than shorter ones. Make sure you consider all of a bank’s maturities before deciding which is best for you.
  • Minimum Deposit Requirements: Often, CDs with higher minimum deposit requirements will yield better APYs.

At the time of writing, interest rates on CDs from some of the best online banks in the country range from around 3.00% to over 4.50%. In general, you have to take out a long-term CD (often for three years or longer) if you hope to find an APY at the higher end of that range. However, some banks – like CIT Bank – are offering attractive rates on CDs with term lengths of less than two years.

Offer Details

Secure application on issuer’s website.

CIT Bank Term CD
APY: Up to 4.50% APY
Monthly Fees: None
Minimum Opening Balance: $1,000
Features:
Daily compounding interest
No account opening or maintenance fees
FDIC insured

Bottom Line

No one has a crystal ball with regard to the economy or what the Federal Reserve will decide to do next. But if the Federal Reserve does increase its benchmark rate again to fight inflation, banks will likely increase the CD rates they offer to customers in response.

If you lock in a fixed rate on a long-term CD now, you might miss out on a better opportunity to earn more interest on your money in the not-so-distant future. Choosing a short-term CD, however, could help you earn more money on your savings for the time being while maintaining the flexibility to lock in a higher rate on a long-term CD when (and if) those opportunities become available. 

While we work hard on our research, we do not always provide a complete listing of all available offers from credit-card companies and banks. And because offers can change, we cannot guarantee that our information will always be up to date, so we encourage you to verify all the terms and conditions of any financial product before you apply.

Michelle Black
Michelle Black
Michelle Black is founder of CreditWriter.com and HerCreditMatters.com. Michelle is a leading credit card journalist with over a decade and a half of experience in the financial industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting, small business, and debt eradication. Michelle is also a certified credit expert witness and personal finance writer.

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