Online CDs: The Road to Higher Yield?
Online CDs: Hefty Yields, More Research
You can buy online certificates of deposit any time day or night -- even in your pajamas.
That's one plus. But an even bigger one is more ka-ching in your pocket. Online CDs are offered by either online-only banks or the online arm of a brick-and-mortar bank. But either version usually pays heftier yields.
"And there's no additional risk if the bank is covered by FDIC (Federal Deposit Insurance Corp.) insurance," says Greg McBride, CFA, senior financial analyst at Bankrate.com.
Even so, online CDs require some study. Ask lots of questions about terms and conditions. And don't forget to assess a bank's online services before handing over your money. If you crave the personal attention of face-to-face banking, you may be disappointed, McBride says.
Also, watch out for CD rates that are temptingly high. "They may signal something to be aware of, such as tying up money for a long time," says Herb Hopwood, president of Hopwood Financial Services in Great Falls, Va. Calculate risks and rewards before investing.
Before you sign up for one, learn how to get the most from your online CD.
Start With Internet Banks
Cyber banks such as Ally and Bank of Internet USA offered some of the highest national CD rates in the nation early in the year.
But that's not all. Ally has wide-ranging CD types, such as high-yield CDs and no-penalty CDs, and even online CDs for which you can raise your rate during its term. "We do have cost advantages as an online bank," says Ann Bellinger, U.S. deposits product executive at Ally Financial in Charlotte, N.C. "So we can pass them on to customers."
There's also an Ally 10-day, best-rate guarantee when you open or renew an online CD. During that window of time, you're given the highest rates available from Ally during the period.
Hopwood says your own community bank is also a good starting point. "Some banks pay better rates online than in the branch, except for the bigger-name banks," he says.
Check a Bank's Rating
Beware: High-paying CDs may be offered by low-rated banks. Though they are brick-and-mortar institutions, these banks may offer their online CDs to customers around the country over the Internet.
Before plunking down money, look up a bank's rating. Bankrate's rate-search engine is one option. "It lists the highest-yielding CDs nationwide," McBride says. He also suggests checking Bankrate.com's Safe & Sound Rating engine, which uses a star rating to rank a bank's stability. Use it to find local banks that may offer high yields.
"Weak banks put out high-rate CDs because they need capital. The FDIC is breathing down their necks," says Donald Cummings, managing partner at Blue Haven Capital in Geneva, Ill.
Ask Lots of Questions
Good online CD deals are about more than high rates.
Terms and conditions, which vary widely, can ding earnings. The CD's minimum deposit may be nothing -- but can be as much as $25,000. Maturities usually range from three months to five years, and can affect early withdrawal penalties.
"As with any CD, verify maturity dates and early withdrawal penalties," McBride says. "Make sure the term of the CD is consistent with your time horizon."
But don't stop there. Find out if your online CD is callable, meaning it can be redeemed by the bank after a no-call window expires. This means you may have your CD yanked before it matures. Rates also can be floating or fixed.
Also, beware of buying a brokerage CD online through the secondary market, though. Brokers can offer good interest rates. But you may lose principal if you sell the CD before it matures. These brokered CDs are issued through banks but are only sold by brokers such as Vanguard or Fidelity. So you may pay a small brokerage fee.
"Many secondary market CDs with longer maturities are callable," McBride says. "Don't chase a few extra basis points by buying a CD with call features that are costly to get out of."
Know Your Banking Needs
Maybe you want a full-service bank. Or you need business checking. Knowing these needs will save you from getting dinged by ATM or other fees. That's why checking out CD rates at your home bank makes sense, especially if you have more than one account there.
"Money talks," says Cummings. "Ask if (the bank) can do better on interest rates if you're already a customer."
Some people also like the personal touch that online CDs don't offer. For example, if you have an account at Bank of America, you can go into the branch and get a problem resolved or a question answered.
So make sure you learn the process for working with an online bank before signing on. You'll want to know how you get your money back, how you make deposits and how customer services works.
You may be a prisoner of snail mail. Don't forget that funding your CD by mail can take several days versus just taking a deposit to your local bank.
"How easy is it to work with the bank?" says Hopwood. "Do you have to wire money or send a check? How do you get your money back?"
Look for FDIC Insurance
When chasing yields, make sure your online CD is insured. Not every bank offers FDIC insurance, and it's crucial. If a bank fails, you'll get your money back.
Bankrate's CD rate search tool only includes FDIC-insured banks. FDIC deposits are insured up to $250,000 per account. The FDIC also has a "bank find" tool that scouts out insured banks nationwide. The tool also gives you information on the bank, such as where it is headquartered and where its branches are located.
"Be careful about FDIC limits," Hopwood says. "People sometimes get into trouble when the bank fails and they're over their limits."