Why Do CDs Have Higher Interest Rates Than Savings Accounts?

Certificates of deposit have higher interest rates than savings accounts because of the increased flexibility the bank has when money is put into a certificate of deposit than it does with money in a savings account, which means its profits will usually be higher. Therefore, it can pass along a portion of the extra earning potential to the consumers.

Liquidity

CDs require you to keep the money in the account until it matures. This means that the bank is able to count on having that money in its coffers for a specific length of time. There is no such guarantee for a savings account.

Investment Potential

When the bank can reasonable assume it will have your money in an account for a long period of time, the bank can make longer-term investments with the money, which increases its rate of return, so the bank can pass along those savings to consumers.

Security

If you withdraw the money from a CD before it matures, the bank is allowed to charge you a penalty, usually worth several months of interest. There is no penalty for withdrawing money from your savings account.

Time Frame

Certificates of deposit have a longer time frame than savings accounts. Certificates of deposit can be as short as a week and up to 10 years or more, but most range from 1 to 5 years.

Service

There is virtually no service required of banks for certificates of deposit because the investor usually does not withdraw money; however, for savings accounts, the bank must provide for deposits and withdrawals.

References

• Investopedia - Certificates of Deposits
• Where to Park Your Cash