Can CDs boost my credit score or help my mortgage application?

By Sabrina Karl

Certificates of deposit are great for stashing away money reserved for buying a home, since their withdrawal restrictions make them harder to access than other bank accounts. But can CDs actually help you qualify for a mortgage? And how do they impact your credit score?

Let’s start with your credit report. Here, the answer is that CDs have no bearing on how good you look to credit rating agencies. That’s because credit scores generally only factor in credit that’s been extended — in other words, your loans, debts and credit lines.

In contrast, bank accounts and investments are savings, not debt obligations, and therefore don’t fall within a credit report’s scope. So no matter how much money you hold in deposit at a bank, whether in CDs or other accounts, it won’t appear in your credit report or factor into your score.

The only exception is for individuals who use a CD as collateral to take out a personal loan. Here, credit has been extended, so the personal loan will make it onto your credit report.

As for how CDs influence mortgage lender decisions, any funds held in certificates can certainly count toward your down payment. But whether your down payment funds come from savings, money market, checking or CD accounts really doesn’t matter. Cash in any of these is calculated equally.

Because CDs are not as liquid as savings accounts, though, the lender may require you to spell out when you’ll cash in the certificates, and perhaps how much you’ll surrender in any early withdrawal penalties.

Other than that, however, owning CDs will not sway the lender to be any more or less favorable to you, making their best value that of securely holding your funds with reduced temptation until you’re ready to apply them to your new home.

How much higher will the Fed raise rates?

By Sabrina Karl

For U.S. savers, what a difference three years can make. Back in December 2015, the Federal Reserve hiked interest rates for the first time since the Great Recession in 2008, finally taking an upward step out of a seven-year valley of near-zero rates.

Fast forward to this December, and the Fed has now made eight additional increases, announcing the latest one last week. The Federal Funds Target Rate now sits 2.25 percentage points above its 2015 level.

This matters to cash savers because savings, money market and certificate of deposit rates are correlated with the Fed’s rate. While any single rate bump might not move the needle across the entire banking industry, this three-year period of nine hikes has driven up rates throughout the deposit accounts market.

But is the Fed finished, or will it hike rates higher still? There is never a reliable crystal ball for this question, as the Fed’s rate-setting committee holds sole responsibility for that decision, and privately meets to determine a verdict every 6-8 weeks. But with each new decision, they submit a written projection for the future, and currently, they’re signaling that we may see two more bumps in 2019.

This information matters particularly to CD savers, since they lock into a rate for the future. As a result, opening a new CD right before a rate hike is announced can be disappointing. On the other hand, savings and money market funds can spontaneously benefit from any number of increases, but at the expense of lower-than-CD rates.

The Fed’s forecast last week of two more hikes in 2019 is a slight downgrade from its previous prediction of three increases next year. But still it suggests that the rising tide cash savers have been enjoying may still have some swell in it.

To score the best CD rates, watch for limited-time promotions

By Sabrina Karl

When you’re looking to sock money away in a certificate of deposit, the No. 1 way to maximize your earnings is to do your homework and shop around. That’s because today’s internet-connected world enables you to search the rates of dozens of banks and credit unions offering CDs nationally or in your area.

As you plot out what you’d like to invest in CDs and for what duration, you’ll likely think of one year, two years, three years, etc. And what you find may fall into those tidy increments. But being flexible will open you up to opportunities that could boost your earnings.

Flexibility allows you to capitalize on promotional CDs that may have unconventional terms. Banks and credit unions tend to have a standard menu of traditional-duration CDs always on tap. But many will offer a special certificate from time to time, one with a much better rate and perhaps an unusual term. It’s not uncommon to see promotions for 5-month, 17-month or 21-month CDs.

Being open to odd-term CDs and adjusting your plan based on what you unearth will help you build a CD portfolio that may not look like what you originally plotted out, but will maximize what you earn from your CD investments.

Another kind of flexibility is also useful, and that’s flexibility of timing. Promotional CDs tend to pop up without warning, and are often available for a limited time. So patiently shopping over time, instead of on a single day, will lead you to more special offers. Funds flexibility will then enable you to jump on a great deal when you find one.

The most lucrative CD portfolios are seldom predictable, perfectly tidy collections. But for savers willing to shop over time and move when they turn up a winner, bottom lines are rewarded.

Are CDs guaranteed?

By Sabrina Karl

 When it comes to earning a return on your money, most options trade risk for return. The greater the risk you’re willing to accept, the more you can potentially earn.

Certificates of deposit are no exception, except in reverse: in exchange for a modest, capped return, your risk is almost nil.

CDs are virtually risk-free in two ways. First, they carry an explicit, unmovable interest rate. You know before depositing funds what rate the bank or credit union has agreed to pay you, and for what period of time you’re both committed.

The only exceptions are CDs with names like “raise your rate”. These special certificates allow you to improve your rate during the CD’s term, at your direction. But they don’t include any reciprocal option for the financial institution to do the rate changing.

But what if the bank with your CD goes under? Even here, you’re almost always protected. The vast majority of banks are FDIC-insured, as are most credit unions, with NCUA insurance. These two federal programs provide an important safety net to consumers, keeping them whole even in the case of a bank failure.

Deposit insurance covers up to $250,000 held by one individual at a single bank. So if you have more than that in deposit accounts, you’ll want to spread it out across multiple institutions.

A bank failure does present the only real risk of a CD, since you’ll likely be offered the choice of cashing out your CD, or continuing at an almost certainly lower rate. Your risk, therefore, is only the possible loss of earning the CD’s advertised rate for the full term.

An infinitesimal number of banks fail these days, so for savers wanting to invest some of their funds in stable, fixed-return vehicles, there is hardly a safer option than CDs.

What to look for when shopping for CDs

By Sabrina Karl

You’ve heard it here before: To maximize what you can earn from CDs, shop around. But what are the most important factors to consider?

Traditionally, savers opened certificates of deposit at the local bank where they held their checking and savings accounts. But with the advent of the internet, plus the growth of credit unions, hundreds of options exist for CD savers no matter where you live, meaning the competition for your deposits has heated up.

Obviously, the primary factor you’ll want to consider is the rate. True, a higher rate means you’ll earn more. But the CD’s term is of course critical as well. Longer CDs pay a higher rate, but you’ll be locked in for longer.

When rates are rising, as they have been for the last three years, shorter-term certificates can be appealing until rates stabilize. But this needs to be balanced with the knowledge that rates are never fully predictable. Though the Federal Reserve is forecasting more increases, nothing is reliable until it actually occurs.

Two other considerations can help you capitalize on potential rate increases. If you’ll be investing in a CD ladder, where you buy multiple certificates of varying terms, finding one institution that offers competitive rates across its whole array of CD terms can greatly simplify matters by allowing you to hold the whole ladder at one bank.

Additionally, no CD comparison is complete without checking early withdrawal penalties. If you opt to cash out early, the penalty for doing so varies widely. So if you’re considering longer CDs, choosing one with the least onerous penalty is smart.

Shopping for your best CD isn’t especially complicated. What’s important is investing some time to evaluate the offerings and check the fine print, as it will almost always translate into more earnings in your pocket.