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Better Interest Rates Can Be Found

May 31, 2000

NEW YORK (AP) _ Like many Americans, I have an interest-bearing checking account at my local bank. It’s a convenience, to be sure, but it’s paying a paltry 0.75 percent interest.

I also have a money market deposit account with my ``emergency stash″ to help get me through a medical crisis or job problem or to cover big household purchases, such as the new air-conditioner I may need this summer. That account is earning a not-much-better 1.75 percent.

That’s not smart _ or profitable _ money management.

It’s especially not smart when interest rates are going up, thanks to the Federal Reserve’s efforts to slow the economy and head off inflation. So now is a good time for small savers to shop for better returns on their money.

A joint study by the Consumer Federation of America and the Credit Union National Association trade group last year determined that Americans could increase their annual interest earnings by $20 billion simply by ``shifting funds at their banking institution from a traditional savings or money market deposit account to a certificate of deposit.″

Very often these certificates of deposit, or CDs, apply toward the minimum balance you must maintain with a bank, thrift or credit union to avoid fees on your checking account. And like other bank accounts, they’re federally insured.

Investing in CDs, of course, requires you to tie up your money for a set period of time _ sometimes for as briefly as a few weeks, but often for as long as five years. In exchange, you get a higher interest rate.

``CDs are at a five-year high,″ said Greg McBride, financial analyst for the online consumer research service bankrate.com. ``There have been steady increases over the past 14 months, in line with the action the Fed has been taking on interest rates.″

Right now, five-year CDs are yielding an average 6.16 percent a year, up nearly 1.5 percentage points from a year ago, he said. The average yield on one-year CDs is up more than a point to 5.54 percent, he added.

So what is it worth to me to move $2,000 of my emergency stash to a one-year CD? Plenty.

My $2,000 will earn just $35 over the next 12 months if I leave it in the money market deposit account. A CD yielding 5.54 percent will get me more than three times as much _ $111 in interest earnings. If I move $5,000, the interest earnings will rise to $277, compared with $88 on the money market deposit account.

Carrie Varian, senior vice president for consumer product management at Bank of America in Charlotte, N.C., cautions that consumers should make sure they don’t lock up so much of their money in CDs and other limited-withdrawal accounts that they don’t have enough liquidity to cover routine expenses. They also need to make sure they maintain the required minimum balances in their checking accounts to avoid triggering fees.

She suggests that those investing in CDs might find ``laddering″ useful and profitable. The way laddering works is that a consumer with $2,000 in savings might consider investing in four $500 certificates that mature at intervals of three months, six months, one year and two years. As each matures, the funds can be spent or reinvested, perhaps at a higher rate.

``In a rising-rate environment, it gives the customer more opportunity to go for even better rates in the future,″ Varian said. ``And it’s a wonderful strategy for someone who isn’t entirely sure when he’s going to need the money.″

There are some good deals now for small savers willing to go to online banks, which also carry federal deposit insurance, the California advocacy group Consumer Action points out.

A newly published survey of six-month CDs at 19 Internet banks and 10 ``brick and mortar″ institutions found the online banks often require lower minimum deposits while offering rates above those of traditional banks.

``X.com, an online bank, offers 5.84 percent on a six-month CD with no minimum,″ the group found. ``Three internet banks surveyed require a minimum deposit of $500: American bank, paying 6.06 percent; USABancShares, at 6.13 percent, and USAccess Internet Bank at 6.22 percent.″

That compared with $1,000 to $5,000 minimum deposits required at traditional banks, which were paying 5 percent to 5.83 percent interest on six-month CDs, the group said.

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