CD Interest Rates – continued

We're sorry, but you can't buy that
high rate Certificate of Deposit we advertised

highest cd interest rates (to first page)

the highest interest rate you see advertised. Sometimes, the best high rate certificate of deposit offers are at out-of-state banks. But, many of them don't want out-of-state depositors.

Why not? They offer a high rate certificate of deposit to attract new local customers in the hope that they'll also start using other, more-profitable services. But, the banks don't want to take in too much money at a high interest rate.

To make a profit, banks have to turn that money around and loan it out at an even-higher interest rate. But in today's low interest rate environment, they can't do that for their most credit-worthy customers. Otherwise, those customers would take their business to a bank down the street with lower borrowing rates. Consequently, if a local bank takes in a lot of money from high rate certificate of deposits, their only recourse might be to make loans to high-risk borrowers who can't get loans elsewhere. But that has its own unique problems and could result in the bank's failure.

Many banks also don't want the headaches of dealing with "hot money" — money that always moves around looking for the best high rate certificate of deposit. If they can't keep their CD interest rates high, hot money leaves. This leads to a never-ending, expensive cycle of spending a lot of marketing dollars to attract new depositors to replace those who left.

Our advice. Don't give up on out-of-state banks. Your search for the best CD interest rates could take a little longer than you first thought, but persistence could result in substantially better yields.

A word of caution: Ask the bank if the CD you want to purchase is callable — can the bank redeem your CD before the end of its term? While it doesn't happen often, calling in a CD early allows a bank to bail out of the high interest it agreed to pay. So ask before you buy, and verify by reading your CD after you receive it. If you aren't happy with it for any reason, you can return it and receive a full refund if you do so quickly — usually within the first 7 days after it is issued.