Why you should open a CD with an online bank this January
With the start of the new year, it makes sense to revisit your financial goals and find opportunities to make your money work harder for you. While there are numerous ways to do that, a certificate of deposit (CD) is a reliable — and potentially lucrative — option to consider, whether you're saving for a major purchase, building an emergency fund or simply looking to grow your wealth. After all, unlike many other interest-bearing account options, CDs offer a fixed rate of return, which means you know exactly how much you'll earn over the term of the deposit.
While traditional banks have long been the go-to for CDs, savvy savers are increasingly turning to online banks to open CD accounts instead. That's because, unlike their traditional bank and credit union counterparts, online banks generally operate with lower overhead costs, allowing them to pass these savings directly to customers through more attractive interest rates and reduced fees. This advantage becomes especially significant when considering long-term savings vehicles like CDs.
And, with the economic landscape evolving, this January is a particularly advantageous time to open a CD account with an online bank. By making this move now, you could set yourself up for financial success in 2025 and beyond.
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Why you should open a CD with an online bank this January
Here's why opening a CD with an online bank right now could be a wise money move.
Online banks offer some of the highest CD rates right now
One of the primary reasons to open a CD account with an online bank is the attractive interest rates these financial institutions offer. For example, while the average 1-year CD currently offers a rate of just 1.76%, many online banks are offering rates of over 4.5% for the same term right now. Over one year, that higher rate can significantly impact your savings, particularly if you're depositing a large sum.
For example, let's say you deposit $10,000 in a 1-year CD with a rate of 4.5% with an online bank. At that rate, you would earn $450 in interest during your CD term, compared to just $200 at a traditional bank offering 2% – resulting in a difference of $250 in just one year.
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The rate environment could shift soon
Economic conditions play a crucial role in determining interest rates, and while rates are still high overall, the Federal Reserve has issued three rate cuts in recent months, dropping the benchmark rate by a full point in total. That, in turn, has led CD rates to decline slightly from what they were this time last year. While it's impossible to predict what may happen in the future, if the Fed continues to cut rates again this year, CD rates would likely decline in tandem.
That means now could be an optimal time to secure the best rate possible on a CD. By opening a CD with an online bank today, you will lock in today's attractive rates for the entire term of your CD, whether that's six months, one year or even five years. This rate guarantee provides valuable protection against future rate decreases, ensuring your money continues earning at today's higher rates even if market rates decline substantially.
Online banks may offer unique flexibility and features
Another compelling reason to choose an online bank for your CD now is the added flexibility and features these institutions typically provide, as many online banks have streamlined their CD offerings to cater to a broader range of customer needs. For example, some online banks offer no-penalty CDs, allowing you to withdraw your money early without incurring significant fees. Others provide options for automatic renewal at the end of the term, ensuring your money continues to earn interest without requiring immediate action.
Online banking platforms are also designed with user experience in mind. That means you can easily open an account, monitor your balance and track your interest earnings through intuitive mobile apps or websites. This level of convenience is often unmatched by traditional banks, which may still require in-person visits or lengthy paperwork.
Some online banks also have lower minimum deposit requirements for CDs. This means you can start earning competitive returns with a smaller initial investment, which could be a big benefit if you want to earn hefty interest but only have a limited amount on hand to invest.
The bottom line
While the decision to open any financial account should be based on your circumstances and goals, opening a CD account with an online bank this January could be a smart move if you're looking to grow your savings. With higher interest rates than traditional banks, the opportunity to lock in rates before potential further decreases and enhanced flexibility through digital features, online bank CDs offer a compelling option for growing your savings.
