Federal Reserve rate hikes, such as today’s 0.25 percentage point increase, can lead to higher annual percentage yields on certificates of deposit, or CDs. Some online-only banks have already increased their rates after the Fed’s last few hikes.
If you own a CD — often called a share certificate by credit unions — here’s a look at what the most recent rate increase means for your savings.
» MORE: December rate hike: Quick Q&A
Seek out higher rates
CDs are a great tool for growing savings 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, CDs with five-year terms have had average APYs well below 1%.
Fed rate hikes don’t cause bank rates to skyrocket overnight, but they can encourage financial institutions to gradually increase their APYs. Why? Banks want to remain competitive and attract potential customers. If a few of your bank’s competitors start increasing rates, yours will likely feel pressure to do the same. This trend has started to play out among online banks. After the Fed’s recent rate hikes, some of these institutions increased their CD rates.
You’ll pay an early withdrawal fee if you close a current CD before the end of its term, also known as its maturity date, to move it to another institution with better rates. The penalties you’ll incur might nullify any gains. You could, however, open a new CD at another financial institution.
» MORE: Best CD rates this month
Ask for your bump up if rates go up
Many financial institutions offer bump-up CDs, which let you request a rate increase if your bank’s rates go up. In most cases, you can exercise this option only once during the term of your certificate. These types of CDs typically 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 a step-up CD. These have interest rates that automatically increase at specific intervals. With a 28-month step-up CD, for example, you might start with a low APY, but your rate will rise 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 yours before it matures.
Watch CD rates
CDs can be a great way to set aside money for the future. And although the Fed rate hikes 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 with those of other banks and credit unions. For help on that front, check out NerdWallet’s best CD rates tool.
Tony Armstrong is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @tonystrongarm.
Updated Dec. 13, 2017.