3 Little-Known Perks of Buying CDs

With interest rates dropping, certificates of deposit (CDs) can be a smart way to freeze them before they get too low. With some CD rates currently north of 4.00%, the headliner perk on today’s top-paying CDs is undoubtedly APY, APY, and APY. But don’t let earning interest obscure some of the lesser-known benefits of buying CDs. Growing your money is important, but these three perks could sweeten a CD contract.

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1. Some CDs allow you to “bump-up” your rate

Standard CDs offer a fixed rate for a specific period. For example, if you lock into a 4.00% APY, you’ll get 4.00% for the length of your term, whether that’s three months or five years.

Locking in at a high rate can be glorious if CD rates fall. But if you lock your CD rate too early, the opposite could happen: You could watch CD rates across the board soar, while yours is still paying out at a lower APY.

This is where a “bump-up” CD can come in handy.

Bump-up CDs let you increase your rate at least one time during your term (some allow several bump-ups). This allows you to capture a higher APY after your term has started. Typically, bump-up CDs have lower initial rates than standard CDs. But they can prove useful in a fluctuating rate environment, especially if you think the CD provider will raise its rates.

To be sure, I don’t think rates will be going up any time soon, which would make bump-up CDs with short terms, like six months, a poor choice. For CDs with long terms, like five years, it might not be a bad idea, since there’s no telling what will happen to CD rates that far into the future.

2. You can access interest as you earn it

While many CDs lock up your initial deposit for the length of your term, some will let you access the interest you’re earning along the way. Yes, even without penalty. Often, these CDs will even transfer the interest into a separate account, like a checking or savings account. Depending on your CDs terms, the interest could be deposited monthly, quarterly, semiannually, or annually.

3. Brokered CDs can be sold on secondary markets

Brokered CDs are a little-known CD type. These CDs are available only through brokerage accounts, such as:

• Fidelity
• Charles Schwab
• Vanguard
• Edward Jones

The broker isn’t the CD issuer but rather buys CDs in bulk from providers, like banks, then sells them to its customers. Often, these CDs have higher APYs than what you’d find directly from a bank.

Because the broker isn’t the CD issuer, it usually doesn’t let you withdraw from your CD — not even with an early withdrawal penalty. Instead, you have to sell your CD on a secondary market if you want out early. This involves finding a buyer who will take the CD off your hands.

Selling a CD on the secondary market could result in a loss, especially if rates have increased since you purchased yours. But for savvy investors focused on the long term, taking advantage of today’s top-paying CDs could eventually result in a gain. If you load up on long-term CDs, you could turn a profit if rates hit rock bottom, not to mention earn high interest as you wait.

Of course, like investing in stocks and other assets, trading CDs has risks. But it’s a strategy that many fixed-income investors simply don’t know about.

All in all, CDs can offer investors more than just a high APY. Don’t get me wrong: Earning high interest on your savings is a major benefit. But dig a little deeper into your CD contract, as you might find some perks that surprise you.