Understanding Promotional Rate CDs: Are They Worth It?

When exploring options for growing your savings, you might come across promotional rate certificates of deposit (CDs). These CDs often boast higher interest rates than traditional CDs, but they come with specific terms and conditions. In this blog, we will delve into what promotional rate CDs are, how they work, and whether they are a good fit for your financial goals. Additionally, we will explore some alternatives to promotional rate CDs to help you make an informed decision.

What Is a Promotional Rate CD?

Promotional rate CDs are a type of CD that offers a higher-than-normal annual percentage yield (APY) for certain term lengths. These deals are often time-sensitive, requiring you to lock in the rates before they expire. Banks and credit unions use promotional CDs as an incentive to attract new customers or encourage existing customers to open CD accounts with specific maturity dates.

How Does a Promotional CD Work?

Promotional CDs function similarly to traditional CDs. You open a CD with a deposit and earn a fixed amount of interest over the CD term. When the CD matures, you can withdraw your principal and interest earnings or roll the CD into a new term. Here are some common features of promotional CDs:

• Higher rates for shorter terms: Promotional CDs may offer high APYs for short CD terms of less than a year, which is unique as financial institutions generally offer higher APYs for longer terms.
• Unconventional CD terms: Terms for promotional CDs may be for unusual timeframes, such as seven months, 10 months, 11 months, or 25 months.
• Varying deposit requirements: Minimum deposits for CDs can vary. Some promotional CDs may have no minimum deposit requirement, while others may require a minimum deposit of $250, $500, or $1,000.
• Automatic renewals: Promotional CDs may automatically renew, but the initial rate isn’t guaranteed for subsequent terms. The bank or credit union should notify you before the renewal so you can decide whether to withdraw funds or roll over to a new CD.

Are Promotional Rate CDs Worth It?

Using a short-term promotional rate CD can be a good way to lock in a high APY without committing to a long CD term. For example, if you plan to make a significant purchase in six months, a promotional CD could help you earn a higher, guaranteed return on your cash until it’s time to make the purchase. The interest earned during the CD term might even cover additional costs like sales tax or assembly fees.

However, it’s crucial to note when the promotional CD matures so you can withdraw your money before it automatically renews. Rates can change when the promotional term ends, so you’ll want to either withdraw the money at maturity or shop around to confirm the rate for the new CD is competitive before committing to a new term.

It’s also important to remember that a promotional rate CD is not a suitable place for emergency savings that you might need to access before the CD term is over. Like traditional CDs, withdrawing money from a promotional CD early can result in penalties that could negate the benefits of the promotional rate.

Alternatives to Promotional Rate CDs

If your goal is to earn a higher APY on your savings, promotional CDs aren’t your only option. Here are some alternatives to consider:

Traditional CD

Basic CDs offer guaranteed returns and potentially more term length options to choose from. However, the interest rates on traditional CDs may be lower than those on promotional CDs or high-yield CDs.

High-Yield CD

High-yield CDs offer a high APY that could be better than promotional CD rates in some cases. It’s worth comparing promotional rate CDs against high-yield CDs when shopping around. A difference in term length of just a few months could make one CD’s APY higher than another.

High-Yield Savings Account

APYs for some high-yield savings accounts at online banks may be comparable to CD rates. Unlike CDs, interest rates on savings accounts are usually variable, meaning the rate can fluctuate. However, savings accounts offer the flexibility to withdraw money without early withdrawal penalties.

Tiered Savings Accounts

If you have a large sum of money to deposit, tiered savings accounts offer a higher APY the higher your balance is. Interest rates on tiered accounts may also be variable, but you can make ongoing deposits and withdraw money without penalty.

The Bottom Line

Promotional CDs are just one of many types of deposit accounts that can earn you a higher yield than a traditional checking or savings account. Shopping around to compare rates across different types of CDs and savings accounts can help you find the best place to put your cash. Start by checking with your current bank or credit union, then expand your search online for other savings vehicles that might provide a high return for your cash.

At O1ne Mortgage, we understand the importance of making informed financial decisions. If you have any questions about mortgage services or need assistance with your financial planning, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate your options and find the best solutions for your needs.