How Often Do CD Rates Change?

A certificate of deposit (CD) is a low-risk investment. You can use CDs to boost savings, set money aside for your child’s education or to save up for a down payment on a home. CD terms are flexible, allowing you to use CDs in short- and long-term savings plans. CD rates fluctuate, however, meaning you can make more money on your deposit by opening a CD when rates are higher.

Keep Reading: 10 Best CD Accounts of 2015

Certain CD products allow you to take advantage of changing rates. Consider the following reasons why CD rates change and how you can take advantage of certain certificate products.

When Do CD Rates Change?

If you can reasonably lock money into a CD for a few months or years, you can grow your money at a higher rate than most checking and savings accounts. CDs are one of the safest investment options you can use. Interest rates fluctuate, however, meaning there is some risk involved when you lock in a rate.

Interest rates can fluctuate due to supply and demand, inflation, and the federal funds rate. An increase in the demand for credit causes interest rates to rise, while a decrease in demand causes rates to fall. Similarly, an increase in the supply of credit will reduce rates, while a drop will increase them.

The higher the rate of inflation, the more interest rates rise. Lenders offer higher rates to compensate for the falling purchasing power of the dollar. As of April 2015, the current inflation rate is -0.2 percent, meaning rates are liable to be lower.

The Federal Reserve Bank also affects interest rates. When the government purchases more U.S. securities, banks receive more money they can use for lending, lowering interest rates. On the other hand, when the government sells securities, interest rates rise.

Current Interest Rate Climate

In early 2015, the average rate for a one-year certificate was 0.27 percent. Five-year CD rates had an average rate of 0.86 percent. By the end of 2015, one-year CD rates are expected to rise to 0.5 percent. Five-year CDs are expected to see average rates of 1.25 percent.

Banks respond differently to rate increases by the Federal Reserve Bank. Some banks are quick to react, while others might take time to gauge the climate before changing rates.

Types of CD Rates

Variable-Rate CD

A variable-rate CD is a short-term investment that pays interest intermittently throughout the certificate’s term. Your CD’s rate will adjust to reflect current market rates. This type of investment allows you to capitalize on rising rates. Your returns might be lower, however, if rates drop.

Rising-Rate CD

Rising-rate certificates are CDs that, in one way or another, allow you to take advantage of rising interest rates. Bump-up CDs, step-up CDs and liquid CDs are all considered rising-rate certificates. Consider the following pros and cons of each type to see which works best for you.

Bump-Up CD

A bump-up CD allows you to change your certificate’s rate once during its term. Bump-up certificates can be beneficial if there is an interest rate hike. You also get to choose when to change your rate.

This type of certificate, however, can sometimes come with lower starting rates than traditional certificates. Banks might also require you to monitor rates on your own, meaning you will be responsible for requesting rate increases.

Step-Up CD

Step-up CD rates automatically increase at predetermined intervals to match market trends. By investing in this type of product, you can capitalize on an improving market without the need to request rate increases. As with bump-up CDs, a step-up certificate is likely to have a lower-than-average starting rate.

Liquid CD

Traditional CDs charge penalty fees if you withdraw from your certificate early. A liquid CD is different. This type of certificate allows you to transfer money out your CD without incurring a penalty. You might be restricted on how you can use your withdrawn funds, however.

Liquid CDs typically come with slightly lower interest rates but allow you more flexibility in how you manage your money. This type of certificate can be a good idea if you want to have access to your funds prior to your CD’s maturity date.

Market trends and CD rates can be difficult to predict. As you comparison shop certificates in your area, consider rising- and variable-rate CDs, which allow you to capitalize on an improving market. If you find a competitive rate you want to lock in, you can take on a traditional certificate to help your savings grow more predictably.

 

This article originally appeared on GOBankingRates.com: How Often Do CD Rates Change?

This article by Laura Woods first appeared on GoBankingRates.com and was distributed by the Personal Finance Syndication Network.