By Jeremy Vohwinkle with Comments
CDs are not typically a major holding for the younger people of generation x, but with higher interest rates and many bank specials being offered this summer, I have seen a lot of people adding CDs to their portfolios. They can be a great short-term savings instrument, but if you aren’t careful or don’t understand the terms of your CD it may end up a costly mistake.
One of the most important times is when your CD matures and what happens to it. Typically the bank or institution where it is held will send you a letter shortly before maturity as a reminder. We are all busy and receive a ton of mail everyday so it can be easy to see how this reminder can be overlooked. This is bad news because a CD usually only has a short period of time at maturity for you to decide what to do. Some grace periods are as short as 5 days, others give you 10.
If you do not make a decision in this time frame and the CD rolls over, this is where it can become a costly mistake. For example, let’s say a 5-year CD matures and it just rolls over. You will then enter another 5-year term whether you like it or not. If that happened right now, it could be a problem because in many places a CD with even a 9-month term is paying the same APY as a 5-year CD. So you could be locking your money up for 5 years when you could have received the same rate with a 1-year or even shorter term.
The next potential problem comes with the CD specials that are often offered. Many banks will not automatically renew your CD for the special rate, even if a special rate still exists. In some cases, the special rate may be over 1% higher than the standard rate. Generally all you need to do is stop into your bank or give them a call once your CD matures and they can renegotiate the CD for the special. If you do not do this and just let the CD renew automatically, you could find yourself missing out on interest.
The bottom line is that when it comes time to renew your CD, even if you plan on keeping the money in the CD, make sure you review your options. You don’t want to find yourself stuck with an unnecessary term or miss out on interest. CDs can be a great savings tool, but make sure you keep up on them so you don’t cost yourself money by missed opportunities.
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Filed Under: Investing • Personal Finance