Why Interest on CDs Can Drop to Near Zero
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Here's your Money Briefing for Tuesday, April 2nd. I'm J.R. Whelan for The Wall Street Journal. Americans have poured $2 trillion into certificates of deposit, or CDs, over the past several years as interest rates continue to climb. But some CD holders are surprised to see their investment is now earning a much lower rate than when they first signed up.
Unlike a savings account, CDs have a due date. They mature. That means that a bank has to do something with that money at the maturity date. Sometimes they could put it into an account or write the account owner a check. But most of the time, the default is that the CD will automatically renew into a new CD.
We'll talk to Wall Street Journal personal finance reporter Amani Moise after the break.
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Many certificate of deposit account holders have found their investments are taking on a much lower interest rate than when they first opened the account.
How did CDs become popular again after years of low rates?
Wall Street Journal personal finance reporter Amani Moise joins me. Amani, for years, CDs were pretty much a forgotten investment. Why have they become so popular recently?
Maybe it's easier to explain why they were so unpopular, and that's because rates were so low for such a long period of time. But what we've seen since 2022 is rates really rising at the fastest pace that we've seen in a really long time. So suddenly, these kinds of deposit accounts gained a lot of interest, and they grew very, very quickly.
How do CDs differ from a savings account in terms of earning interest?
CDs are less flexible than a savings account, but the benefit of that is that so is the rate. The rate is also less flexible. So with a savings account, the rate can fluctuate from month to month depending on the account. But with a CD, you're guaranteed to earn the same amount of interest for a specific period. So sometimes that's six months, 12 months or even longer.
As you reported, many CD holders discovered much to their surprise that their CD was earning a much lower rate than what they initially signed up for. How did that happen?
Unlike a savings account, CDs have a due date. They mature. And that means that a bank has to do something with that money at the maturity date. Sometimes they could put it into an account or write the account owner a check, but most of the time the default is that the CD will automatically renew into a new CD.
You spoke to a man from Nevada who went through this. What did he tell you?
So he had an 11-month CD that was part of a CD ladder that he put together last year. And then he got a notification from his bank that his CD was maturing and that if he didn't take action within a certain amount of time, it was going to automatically renew at the default rate. So when he got that email, he looked online and saw that bank was still offering pretty competitive rates. So he decided just to let it auto renew. But then a few months later, he goes in to check his balances and he notices he's not earning much interest.
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