What are CD rates and how are they determined?

If you've ever wondered, “What are CD rates?”, this refers to the interest rate earned on a CD account. You may already be aware that CDs usually have higher interest rates than savings accounts, but understanding the driving force behind those higher CD rates may help you make more informed decisions about where to deposit your money. Let’s explore the factors that shape CD rates and learn a few ways to help you find the highest CD rates on the market. 

What are CDs?

A certificate of deposit account is a type of deposit account that comes with a “term period,” which is a set length of time during which your CD rate remains fixed. An early withdrawal during this “term period” may result in an early withdrawal fee. Contact your bank to learn more about 1-year cd rates, 5-year cd rates and rates for those extending beyond 5-years.

How banks set CD rates

CD rates can be influenced by numerous factors, including the current economic climate, inflation and market dynamics. For example, when inflation is low, interest rates tend to be lower. Conversely, when inflation is high, interest rates are usually higher. Part of this has to do with the federal funds rate — the interest rate at which banks lend money to each other overnight. When the macro rate environment moves, which may be as a result of actions by the Federal Reserve, interest rates for CDs, savings accounts and borrowed money tend to rise or fall with it.

Most CD rates are fixed, meaning they typically don't change during the term period. This can, however, vary by CD type. Some financial institutions offer CDs, such as bump-up or step-up CD accounts, with rates that can fluctuate depending on changes in any of the above factors.

Tips to help find a high CD rate

There are a few things you can do to help find a high CD rate and find the right one for you:

• Shop around: Different banks offer different rates, so it may be worth taking time to compare offers from different institutions. You can check CD rates online or go to local banks and credit unions to see what they have to offer. Keep in mind that the rate offered may vary with the deposit amount and CD term.
• Look for promotions: Some banks offer promotional CD rates to attract new customers with higher than regular rates. It may be worthwhile to check if any promotions are currently available. Remember that promotional rates may be time-limited and that understanding the terms and conditions may help prevent unexpected surprises down the line.
• Watch term periods: The CD term can have a significant impact on the interest rate offered. CDs with longer terms may offer higher rates than those with shorter terms. Keep in mind that the longer the CD term, the longer your money won’t be available. If you do need access to your funds during this time period, you may receive an early withdrawal fee.
• Consider a CD ladder: A CD ladder is a strategy that allows you to take advantage of the higher rates of longer terms while still maintaining periodic access to your money. A CD ladder involves dividing your funds into several CDs of varying term periods. This way, you can regularly access portions of your money and still possibly earn a higher rate on the longer-term CDs.
• Find the highest CD rates today: CD rates change frequently, so it's important to stay up to date on the current rates. Checking online or in-person for the most recent and up-to-date information about the highest CD rates today can help you stay informed. How a particular CD rate is compounded may also be worth considering.
• Remember, a high CD rate is not the only factor to consider: While a high CD rate is important, using your own timelines and financial goals as the foundation of your choice may help guide you to the best CD for you.

In summary

What are CD rates? A CD rate is the interest rate offered on a certificate of deposit account. Financial institutions typically make CD rates higher than the interest rates of traditional savings accounts, which encourages customers to store their money in a CD for a longer period. Numerous factors come together to influence the exact interest rate for a CD at a particular time. Economic conditions, interbank competition and the federal funds rate inform a bank’s ultimate calculation. Keeping an eye out for higher rates and promotional offers, and making sure to understand your options can help steer you toward the CD rates you’re ultimately looking for.