How to Compare Bank CD Interest Rates
When you put money into a bank certificate of deposit (CD), you want to get the best possible return. There are several factors to take into consideration. For example, if you will need the money in the near future, you will have to settle for a lower interest rate. Once you determine how long you can afford to keep your money tied up in a CD, you will need to compare other features among different CDs with the same annual return, such the annual percentage yield (APY).
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Instructions
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Determine how long you can leave your money in the CD. Banks charge a penalty for redeeming a CD before it matures, so be sure that you will not need your money sooner. CDs are usually offered for terms of three months, six months, one year and five years. Short-term CDs pay a much lower interest rate than long-term CDs. As of May 8, 2010, the national average yield for a six-month CD was 0.91 percent. The average for a five-year CD was 2.88 percent.
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Compare the annual percent yields (APYs) of CDs with the maturity term you have chosen. Frequently your bank will quote two interest rates for each CD. One is the annual percentage rate, which is the base rate of return. The other rate is the APY, which is the actual rate you will receive when the effects of compounding are factored in. "Compounding" means that the bank computes your interest according to a fixed schedule and credits it to your account. Each subsequent time that the bank computes your interest, it does so on your new (and growing) balance. You earn interest on your interest. Choose the CD with the highest APY, within your preferred maturity time.
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Compare the compounding periods. If your bank does not provide the APY, then compare the compounding frequencies for CDs with the same annual interest rates. The more frequent the compounding period, the faster your money grows.
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Use an online CD interest rate calculator to determine your actual return. This is an opportunity to see how different compounding frequencies affect your APY. Enter the amount of your CD, the maturity time (in months) and the annual interest rate (not the APY), then select a compounding period. Your results will include the total amount of interest your CD will earn over its lifetime, as well as your APY.
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References
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