What happens to a forgotten CD?

By Sabrina Karl

Though some might find it hard to imagine, money socked away in CDs occasionally falls off the radar. Off the saver’s radar, that is. But banks don’t forget, and though you won’t lose your money, you may not be able to claim it as easily as you’d like.

When a certificate’s maturity date is soon approaching, your bank will remind you of the upcoming date, along with instructions for specifying what you want done with the funds. But if you neglect to provide instructions, most institutions will roll the money into a new CD of the same term. So if your maturing certificate had a five-year term, the bank will move the funds into a new five-year CD.

If you miss your maturity date, because you left mail unopened or you changed address and didn’t receive the notice, there is usually a 10-day grace period during which you can still direct the funds. But if it’s been months or years, you’ll have to contact the bank to inquire where they moved your money.

The good news is that the funds are still yours. But once they’ve been rolled into a new CD, you face two disadvantages. First, the interest rate on the new CD is not likely to be competitive, so you’ve given up your chance to earn more with a better certificate. Second, you’ll be forced to either wait until the new CD matures, or pay an early withdrawal penalty. These penalties vary widely across banks, but can be steep.

Claiming a forgotten CD isn’t complicated, but you’ll almost certainly reduce your earnings by having neglected to act at maturity. So avoid penalties and lost earnings by putting maturity dates on your calendar, opening all financial mail promptly, and keeping your address up to date with financial institutions.

What happens to my savings or CD if my bank fails?

By Sabrina Karl

 The chances of a bank failure are extremely slim these days. And the odds of your bank being seized are even more miniscule. Still, if you wonder what would happen to your deposits should that unlikely event take place, it’s easy to set your mind at ease.

First, let’s look at the narrow odds of this happening. True, in the five years following the 2008 financial crisis, 465 banks were shuttered. But as we know, those were historically unique circumstances. In contrast, annual bank failures have numbered in only the single digits for the past three years, and so far in 2018, not a single bank has been closed by the Fed.

With the U.S. having almost 8,000 operating banks, if eight closed in a year, that would represent just one-tenth of one percent, or a 99.9 percent “safe” rate.

But what happens to your funds if you do bank at a failed institution? The good news is that, assuming the bank is FDIC insured (the vast majority are) and you don’t hold more than $250,000 at that bank, the federal government ensures will not lose your funds or any earned interest.

That said, your deposit terms will likely change, as dictated by the bank that took over your bank. This comes into play most significantly with CDs, where the new bank is likely to offer you the choice of exiting the CD with no penalty, or continuing at a new (likely lower) interest rate.

All this means that your biggest risk will be losing an attractive rate, if you were receiving one. But since you’ll be allowed to exit your CD, and since savings, checking and money market funds can be withdrawn at any time, you’re free to shop around and take your money where you can earn more.

Why smart CD savers check the Fed’s calendar

By Sabrina Karl

Once again, the Federal Reserve has raised interest rates, the third time it has done so this year. Though no one can reliably predict how often the Fed will make increases, smart CD savers will note the Fed’s calendar.

The Fed’s rate-making body is called the Federal Open Market Committee, or FOMC, and it meets on a publicly announced schedule of every 6-8 weeks (google “FOMC calendar” for the dates). Upon the conclusion of each meeting, the committee announces its rate decision to the press.

The reason this matters to CD savers is because an increase by the Fed generally ripples out to increases by banks and credit unions on their savings and CD accounts. While it won’t happen instantly, the general deposits market will move upwards.

If you have a savings or money market account, you won’t need to do anything to benefit from increases your institution makes. But with CDs, the calculus is different, since you’ll be locking in one rate for the duration of the CD’s term.

That’s why it’s smart to check the FOMC calendar to avoid locking into a new certificate right before a possible rate hike, sticking you with a lower rate than you might be able to earn if you hold of until the next FOMC decision.

From December 2008 until December 2015, the FOMC held its rate to near zero to stimulate an economic recovery after the financial crisis, and bank deposit rates tanked to historic lows. Since then, the Fed has raised rates once per year in 2015 and 2016, and now three times each in 2017 and 2018.

It’s always uncertain what the committee will decide at its future meetings, but the savvy saver knows it’s better to lock in new CD rates after, and never before, a Fed rate hike.

Why it matters whether your bank is FDIC-insured

By Sabrina Karl

Bank failures sound scary. All of a sudden, the federal bank regulators rush in unannounced and shut the operation down. And whether you hold accounts at that bank or not, you’ll find out at the same time as everyone else – after the fact.

But while that may sound scary, for the vast majority of a bank’s depositors, there really is no significant danger. That’s because the U.S. has a sophisticated, well-run insurance system called the FDIC, which protects your funds should a bank fail.

The Federal Deposit Insurance Corporation is a government entity started during the Great Depression to restore confidence in the U.S. banking system. And confidence and trust is exactly the sense it should bring you today. Because unless you have a very large sum deposited at a single bank, FDIC insurance has your back.

The way it works is that all deposits up to $250,000 held by a single individual at a single FDIC-insured bank will be reimbursed by the government if the bank is seized. But even if you have more than that amount held in bank accounts, you can still protect yourself. If you’re married, you can hold up to $250,000 in each spouse’s name, for $500,000 in total coverage. Or, you can split your deposits among more than one bank, so you don’t exceed $250,00 with any one institution.

Of course, this works if you hold your deposits at an FDIC-insured bank, which is most of them. However, banks do exist that provide private deposit insurance instead of FDIC coverage. It’s possible you’ll be just as safe with these privately insured banks, but many savers feel more comfortable sticking to government-backed insurance.

Fortunately, it’s easy to check if a bank is federally insured. Just check the bank’s materials or website for the FDIC logo.

Is a “raise your rate” CD a good choice?

By Sabrina Karl

Since CD savers generally focus on maximizing their rate of return, special certificates with a name like “Raise Your Rate” are going to grab some attention. But as with all things surrounding CD selection, you’ll be well served by shopping around and then ensuring you understand any CD’s terms before opening it.

A “raise your rate” CD, sometimes called a “bump-up CD”, offers savers a special option to increase their interest rate during the maturity period. Usually you’ll be afforded one rate bump, although some longer CDs allow for two increases.

The bank will also spell out the rules for what new rate you can capture. Generally, you’ll be allowed to take advantage of the bank’s current rate on that same CD term.

It sounds ideal, at least in periods when interest rates are on the rise. But there are still good reasons you may prefer a standard CD.

First and foremost is the cardinal rule of always shopping around when choosing a CD. Rates across banks and credit unions vary widely, especially as online access to institutions outside your community grows. So even though you can boost the rate later, your rate today still needs to be competitive compared to other CDs.

Second, beware that you can only capture a new, better rate from the same exact term as your current CD. If your original CD is an odd term, or the bank tends to release its best rates on promotional odd-term certificates, you may never have a chance to capitalize on a rate increase.

If you’ve done your research and a particular “raise your rate” CD still seems like a good buy, it certainly offers a nice perk during these days of rising interest rates. Just don’t go in without that all-important step of shopping around.