Some banks offering attractive CD rates to draw new customers
By TERRY SAVAGE firstname.lastname@example.org or @TerryTalksMoney February 21, 2013 1:26AM
Updated: May 3, 2013 12:15PM
Q. I have been seeing newspaper ads for six-month CDs paying 2 or 3 percent interest. Some are ads placed by “brokers” who say they can get you these higher rates in bank CDs. Are these legitimate or scams?
A. You are correct in questioning these ads, since the national average rate for a six-month certificate of deposit is 0.45 percent, according to bankrate.com. And even the highest six-month CD rates on their site offer less than 1 percent interest.
But there is an explanation — and it all comes under the heading of “marketing.” These eye-popping rates are a way to attract new deposits. And when you do the math, it becomes apparent that these deals are a relatively inexpensive way for banks to do that.
Read the ad carefully. The amount you can deposit to receive this way-above-market rate is limited — typically to $10,000 or $25,000. And the time frame is limited to a six-month CD.
Now, do the math. If you put $10,000 into this account at a 2 percent annual rate, you would earn $200 in one year. Or $100 in interest in 6 months. (Forget compounding; let’s keep this simple.)
Leaving the same CD in your current bank, you would receive 0.5 percent interest for one year: $50. Or $25 in interest for six months. (Yes, that’s paltry, which is why you are attracted by higher yields.)
But think of it from the bank’s point of view. The difference is $75 — and that is a relatively small price to pay to acquire a new customer. Especially since no one wants toasters anymore.
The bank is betting that at the end of six months, when rates drop back to “normal” levels, you’ll look around, decide it’s not worth it to move again, and keep your money in their bank.
There are some warnings before you make this kind of move.
First, you need to make sure that you are getting into an FDIC-insured CD, not some kind of “note” or other security. Seniors, especially, can be vulnerable to this kind of scam.
Some of these ads are placed by “brokers.” They are likely not registered or regulated if this is their only business, because technically bank CDs are not securities. However, some banks do pay brokers a small fee to bring in new accounts. It’s just another marketing cost.
If you are using a broker, make sure your money is deposited directly into the bank. Never make the check payable to the broker! Better yet, insist on having your money wire transferred to the new bank. It may cost a few dollars, but the security is worth it.
Finally, ask yourself if it’s worth the hassle, and potential exposure to fraud, to earn an extra bit of money. It’s certainly wise to seek the best yields, but better to find a home for your money by searching bankrate.com, where you can deal directly with banks whose offerings have been verified, and are not limited in amount.
When it comes to “chicken money,” peace of mind is priceless. And that’s the Savage Truth!