What Is a Promotional Rate CD?

When shopping around for a certificate of deposit (CD), you might encounter promotional CDs marketed with special rates. Promotional rate CDs are a type of CD that may earn rates higher than traditional CDs, but the promotional offer may only be available for a limited time. Here, we break down what a promotional rate CD is, how it works, and if it’s worth it.

How Does a Promotional CD Work?

Promotional CDs work like typical CDs, where you open a CD with a deposit and earn a fixed amount of interest for the duration of your CD term. When your CD matures, you can withdraw your principal and interest earnings, or you can roll your CD into a new term.

Below are common features of promotional CDs:

• Higher rates for shorter terms: Promotional CDs may offer high APYs for short CD terms of less than a year. This is a unique feature because financial institutions generally offer higher APYs to CDs with longer terms.
• Unconventional CD terms: Terms for promotional CDs may be for unusual timeframes, like seven months, 10 months, 11 months, or 25 months.
• Varying deposit requirements: Minimum deposits for CDs can vary. In some cases, there may be no minimum deposit required to open a promotional CD, while in other cases, you may need to make a minimum deposit, such as $250, $500, or $1,000.
• Automatic renewals: Promotional CDs may automatically renew, but the initial rate isn’t guaranteed for subsequent terms. The bank or credit union should notify you before the renewal so you can decide whether to withdraw funds or roll over to a new CD.

Are Promotional Rate CDs Worth It?

Using a short-term promotional rate CD can be a good way to lock in a high APY without committing to a long CD term. For example, if you want to buy a new bedroom set in six months, and the money you have saved for the purchase is earning hardly any interest in a savings account, opening a six-month promotional CD could be a way to earn a higher, guaranteed return on your cash until it’s time to buy the furniture. The interest earned during the CD term might even be enough to help you pay for extra costs like sales tax or assembly fees.

However, it’s important to take note of when the promotional CD matures so you can draw money before the CD automatically renews. Rates can change when the promotional term ends, so you’ll want to either withdraw the money at maturity or shop around to confirm the rate for the new CD is competitive before committing to a new term.

Lastly, a promotional rate CD is not a good place to put emergency savings you might need to access before the CD term is over. Like traditional CDs, taking money from a promotional CD can result in early withdrawal penalties that could make the promotional rate less worthwhile.

Alternatives to Promotional Rate CDs

If your goal is earning a higher APY on your savings, promotional CDs aren’t your only option. Below are alternatives to promotional rate CDs:

• Traditional CD: Basic CDs offer guaranteed returns and potentially more term length options to choose from. However, a drawback is that interest rates on traditional CDs may be lower than on promotional CDs or high-yield CDs discussed below.
• High-yield CD: High-yield CDs offer a high APY that could be better than promotional CD rates in some cases, so it’s worth comparing promotional rate CDs against high-yield CDs when shopping around. A difference in term length of just a few months could make one CD’s APY higher than another.
• High-yield savings account: APYs for some high-yield savings accounts at online banks may be comparable to CD rates as well. Unlike CDs, interest rates on savings accounts are usually variable, which means the rate can fluctuate. However, savings accounts give you the flexibility to withdraw money without having to worry about the early withdrawal penalties that come with CDs.
• Tiered savings accounts: If you have a large sum of money to deposit into savings, tiered savings accounts offer a higher APY the higher your balance is. Interest rates on tiered accounts may also be variable, but you can make ongoing deposits and withdraw money without penalty.

The Bottom Line

Promotional CDs are just one of many types of deposit accounts that can earn you a higher yield than a traditional checking or savings account. Shopping around to compare rates across different types of CDs and savings accounts can help you find the best place to put your cash. The first place to shop is at your current bank or credit union. From there, you can expand to search online for other savings vehicles that might provide a high return for the cash you stash.

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