Savers have endured historically low interest rates for the last several years, so even a minor upward move raises hopesof capturing slightly greater returns.Federal Reserve rate hikes, such asthe 0.25 percentage pointraise on March 15, can lead to higher annual percentage yields on certificates of deposit, or CDs.If you own a CD — often called a share certificatebycredit unions — here’s a look at what the recent rate hike means for your savings.
Look for higher rates
CDs are great tools for peoplewho want to grow theirsavings over a set time period. The longer a CD’s term, the higher the rate; most financial institutions offer terms of up to five years. But during the last few years, even CDs with five-year terms have had average APYswell below 1%.
Fed rate hikes don’t cause bank rates to skyrocket overnight, but they canencourage financial institutions to gradually increase their APYs. Why? Banks want to remain competitive and attract potential customers. If a few of your bank’s competitorsstart increasingrates, yours will likelyfeel pressure to do the same.
But again, don’t expect massive improvements. After the rate hike in December 2015, many of the biggest banks raised loan rates while leaving savings rates mostly unchanged — a tactic that boosts financial institutions’ margins. Whether banks will react the same way this time around remains to be seen.
If you do find an alternative with better rates, you’ll payan early withdrawal fee if you close a currentCD before the end of its term, also known as its maturity date, to move it to another institution. The penalties you’ll incur might nullify any gains. You could, however, open a new CD at a financial institution with better rates.
» MORE: What is a CD?
Ask for your bump up if rates go up
Many financial institutions offer bump-up CDs, which let yourequest a rate increase if yourbank’s rates go up. In most cases, youcan exercise this option only once during the term of yourcertificate. These types of CDstypically have lower interest rates than fixed-rate certificates, and many carry steeper minimum deposit requirements.
Another option: step-up certificates
If you want a savings product that functions much like a bump-up CD but with more predictable rate increases, consider investing in a step-up CD. These have interest rates thatautomatically increase at specific intervals. With a 28-month step-up CD, for example, you might start with a low APY, but yourrate will go up every seven months.
Again, initial interest rates on these products tend to be low, and some of these CDs and share certificates are “callable.” That means you might never see the rate boost because the issuer might redeem yoursbefore it matures.
CDs can be a great way to set aside money for the future.And although the Fed’s rate hike might not lead to dramatic changes, it’s still a good idea to monitor your bank or credit union’s response to the news and compare it withthat of other banks and credit unionsnear you. For help on that front, check out NerdWallet’s best CD rates tool.
Updated March 15, 2017.