Certificates of Deposit (CD) have been popular for business owners seeking stable and relatively safe investment avenues, particularly with rising interest rates. While CDs often advertise attractive initial rates, important considerations must be made to avoid pitfalls.
One common issue arises at the maturity of these CDs. Many financial institutions have an automatic rollover policy, where your money is reinvested into a new CD with possibly lower interest rates unless you take action. This can significantly reduce your returns if not monitored closely. For example, a CD might initially offer a 4.50% annual percentage rate (APY) and, upon maturity, rollover with an APY of just 0.10%. Promotional rates on Certificates of Deposit are expected, but we have never offered them at Summit Bank.
While banks are generally required to notify you when your CD matures and will roll over, they may only provide the new interest rate if you contact them directly. This underscores the need to proactively manage your investments by carefully checking the terms at renewal, empowering you to make informed decisions.
It’s important to note that promotional or special rate CDs are particularly prone to rate changes at renewal. These often come with specific terms like seven or 11 months and do not guarantee the initial rate upon rollover. Without careful attention, a lucrative investment can quickly turn into a lower-yielding one, underscoring the need for vigilance.
To manage your CDs effectively, consider setting digital reminders for their maturity dates and thoroughly reviewing the renewal terms provided by your bank. Being prepared to renegotiate or move your funds to a more profitable option at renewal can help maintain or even increase your investment returns.
Negotiating with your bank could be beneficial if your renewal rate is noncompetitive. Banks might be more flexible than expected, especially if they wish to retain your business.
While CDs can offer good returns and security, they require active management to ensure they remain a beneficial part of your business’s financial strategy. Always stay informed and ready to act to make the most out of your investments.