Personal Finance

Why you may be getting ‘shortchanged’ on CD interest rates, researcher says

Published

1 day ago

January 28, 2025

Business Finance News

Boonchai Wedmakawand | Moment | Getty Images

You may be leaving money on the table when it comes to certificates of deposit, some research suggests.

CDs have a set term, ranging from a few months to five or more years. Upon maturity, banks return the depositor’s principal plus interest.

Consumers who want their money early must generally pay a penalty, losing out on months of interest. However, paying that withdrawal penalty may be worthwhile for many savers who adopt the right strategy.

That’s what is suggested in a recent research paper from Matthias Fleckenstein, associate professor of finance at University of Delaware, and Francis Longstaff, finance professor at the University of California, Los Angeles.

Rather than pick a short-term CD, consumers often get a higher return by choosing a long-term CD and paying a penalty to pull money out early, they found.

Consumers who are unaware of the strategy may get “shortchanged” by banks, Fleckenstein told CNBC.

‘The rule rather than the exception’

Here’s an example: If an investor puts $1 in a five-year CD with a 5% interest rate and cashes it out after one year with a penalty equivalent to six months of interest, they would receive about $1.03, which is slightly more than the $1.01 they would get from a one-year CD with a 1% interest rate, despite the penalty incurred for early withdrawal.

Banks frequently price CDs this way, Fleckenstein and Longstaff wrote in their paper, published in October in the National Bureau of Economic Research.

The researchers examined weekly CD rates offered by 16,891 banks and branches — ranging from small community banks to big nationwide institutions — from January 2001 to June 2023. Rates were for accounts up to $100,000.

About 52% of CDs offered during that period had such “inconsistencies” in pricing when comparing a given term against a longer-term CD cashed in early, they found.

“It’s the rule rather than the exception,” Fleckenstein said.

“There are banks that do this all the time,” he said, and “there are some that don’t do this at all.”

At banks where this happens, the difference in returns “is not tiny,” Fleckenstein said. In fact, the pricing inconsistency is about 23 basis points, on average, over the roughly two decades they assessed, he said.

Given that disparity, the average investor who invested $50,000 could have gotten an extra $115 of interest by picking a longer-term CD and cashing it in early, their research suggests.

The average size of that pricing difference rose as interest rates began to increase during the Covid-19 pandemic, Fleckenstein said.

CDs often for ‘safety and liquidity’

Households that save in CDs are generally looking for “safety and some liquidity” for a chunk of their assets, said Winnie Sun, co-founder of Irvine, California-based Sun Group Wealth Partners and a member of CNBC’s Financial Advisor Council.

The typical CD buyer has a goal in mind, like saving for a home down payment, and wants to earn a modest interest rate without subjecting their money to much risk, Sun said.

About 6.5% of households held assets in CDs as of 2022, with an average value of about $99,000, according to the most recent Survey of Consumer Finances.

Like any investment, there are pros and cons to CDs.

For example, unlike other relative safe havens like high-yield savings accounts or money market funds, CDs offer a guaranteed return over a set period with no chance of market-based losses. In exchange, however, CDs offer less liquid access to your cash than a savings account and lower long-term returns than the stock market.

“Shop around for the best CD rate across banks, but also look within banks at whether it actually may pay off to accept a longer term but pay an early withdrawal penalty,” Fleckenstein recommended, based on his research findings.

The option may not be as prolific in the current market environment, though.

Long-term CDs typically pay a higher interest rate than shorter-term ones, Sun said. But average rates for one-year CDs are currently higher than those for five-year CDs: 1.7% versus 1.4%, respectively, according to Bankrate data as of Jan. 20.

Households can pursue other CD strategies, Sun said.

For example, instead of putting all savings into a long-term CD, consumers might put a chunk of their money into a long-term CD and with the remaining funds build a “ladder” of shorter-term CDs that mature more quickly. They can then buy more CDs if they’d like once the shorter-term ones come due.

Personal Finance

Changes Americans would make to close Social Security’s financing gap

Published

10 hours ago

January 29, 2025

Business Finance News

Halfpoint Images | Moment | Getty Images

It’s no secret that Social Security faces a long-term financing gap.

If nothing is done by 2035, 83% of combined benefits will be payable if Congress does not act sooner to prevent that shortfall, according the latest projections from the program’s trustees.

What’s more, new legislation, the Social Security Fairness Act — which increases benefits for more than 3 million workers who also receive public pensions — is expected to move that depletion date six months sooner.

A new survey asked more than 2,200 Americans — most of who expect Social Security to be an important part of their monthly retirement income — how they would solve the problem.

Most respondents, 85%, said they would prefer benefits remain the same or are even increased — even if that means raising taxes for some or all Americans, according to the survey from the National Academy of Social Insurance, AARP, the National Institute on Retirement Security and the U.S. Chamber of Commerce in collaboration with Greenwald Research.

“They’re willing to pay more, not to get extra benefits for themselves, but just to close the financing gap to prevent indiscriminate across the board benefit cuts,” said Tyler Bond, research director for the National Institute on Retirement Security.

Meanwhile, 15% of respondents said they would prefer tax rates not increase, even if that means benefits are reduced.

What changes Americans would prefer

The survey used a tradeoff analysis to let respondents pick the policy changes they would not only prefer to see — but also for which they would also be willing to pay.

The results found a combination of changes was preferred by most respondents, regardless of their political affiliation, income, age or education.

The most popular policy option with respondents was eliminating the payroll tax cap for individuals earning more than $400,000.

For 2025, employees and employers pay taxes toward the program on up to $176,100 in earnings. Once high earners hit that cap, they stop contributing Social Security payroll taxes for the year.

The change would reapply payroll taxes starting at $400,000 in earnings. Individuals affected would not receive additional benefits.

A second policy option that was nearly as popular was raising the payroll tax rate. Currently, employees and employers each pay 6.2% toward Social Security. The change would raise that to 7.2%.

Maximizing your Social Security benefits

Other changes favored by respondents aim to make benefits more generous by adjusting the annual cost-of-living adjustment to more accurately reflect the spending habits and inflation affecting older Americans; providing a caregiver credit for people who stop working to take care of children under age 6; and providing a bridge benefit to workers in physically demanding jobs to help soften cuts for claiming early.

The least popular change was to reduce benefits for people with higher incomes. That would affect individuals with $60,000 or more in annual retirement income excluding Social Security, and married couples with $120,000 or more.

Taken together, the changes would close Social Security’s funding gap and result in a minor 1% surplus, according to NIRS’ Bond.

Notably, other changes that have been suggested elsewhere — raising the retirement age, across-the-board benefit increases and changing taxation of benefits — were not selected by the survey respondents.

Long history of strong public support

The new report coincides with another report released by NIRS this week that analyzed Social Security polling over more than four decades and found public support for the program remains strong.

“Not only do people consider Social Security a really important program, but they really want to make sure we’re spending enough on the program so that it can be there when people are ready to collect their benefits,” Bond said.

Notably, confidence that Social Security benefits will still be available tends to increase as people get closer to retirement age, he said.

Personal Finance

Make this your ‘last resort’ to cover an emergency expense: advisor

Published

10 hours ago

January 29, 2025

Business Finance News

Rainstar | E+ | Getty Images

People who use a credit card to cover an emergency expense are solving only part of the problem.

Why? Because while using a credit card for emergencies can be helpful in the short term, carrying a balance can lead to significant interest charges if not paid off quickly.

About 25% of respondents said they would use a credit card to pay for an emergency expense and pay off the card balance over time, according to a new report by Bankrate. That is up from 21% in 2024.

The site polled 1,039 adults in early December.

Paying off unexpected expenses with credit should be “a last resort,” said certified financial planner Clifford Cornell, an associate financial advisor at Bone Fide Wealth in New York City.

If you don’t pay the balance off, you’re faced with high-interest rate debt. The average annual percentage rate for credit cards is now about 20%, according to Bankrate data.

Let’s say your home water heater breaks — a repair that costs $600 on average, per SoFi. If you put that cost on a credit card with a 20% interest rate, you will pay about $10 in interest if you can’t zero out the balance after a month, according to a Bankrate calculator.

Make only the minimum payments toward that debt, and it will take you more than five years to pay it off, Bankrate estimates. That means you’ll pay nearly $400 in interest.

“Using your credit card to pay for ’emergency expenses’ is just incredibly expensive,” CFP Lee Baker, founder, owner and president of Claris Financial Advisors in Atlanta. He’s also a member of CNBC’s Financial Advisor Council.

Imagine you’re paying this debt off and a new emergency comes up, compounding the problem: “While the timing of these instances can be uncertain, the inevitability of them is not,” said Mark Hamrick, a senior economic analyst at Bankrate.

Who uses credit cards for emergencies

Individuals who lean on credit cards in emergencies might not have enough savings to cover the tab, experts say.

While “there’s a reason they’re in that position to begin with,” it might not necessarily be rooted in poor financial decisions, Baker said.

“It could be someone younger who has simply not had the time to build up some emergency savings,” he said.

In fact, the same Bankrate report found that only 28% of Gen Z adults — or those of ages 18 to 28 — can pay for a $1,000 surprise expense in cash.

Instead, the group is more likely to pay an unexpected cost with a credit card and pay it off over time.

About 27% of Gen Z adults will finance an emergency on a credit card, compared with 25% of millennials, or adults ages 29 to 44, according to Bankrate data provided to CNBC.

To compare, 25% of Gen X — adults ages 45 to 60 — would pay for an unexpected cost with a credit card while 21% of baby boomers — those ages 61 to 79 — would do the same.

Experts urge individuals to create an emergency fund, whether that means putting away even a small amount in a separate account every month.

Advisors suggest that people should aim for three to six months’ worth of living expenses in case you have big unexpected expense, suffer from a job loss or face major medical bills. But saving that much money “can be a very daunting task,” Baker said.

Instead, “think of it like a ladder” and break it down into smaller, achievable goals to gain momentum, he said.

In the end, “having that cash reserve will really provide a lot of peace of mind,” Cornell said.

What to do if you need credit for an emergency

If you’re in a situation where you do not have enough emergency savings and need to rely on a credit card, “you’re going to want to pay that down as quickly as possible” to avoid high interest tacking onto the original balance, Cornell said.

If you can’t, Baker says to “absolutely avoid paying [just] the minimum.” Attempt to break the cost into two or three larger payments to avoid incurring as much interest, he said.

A third option to consider is a potential 0% balance transfer card. If you qualify, the card often allows you to pay off the outstanding balance for a set period of time with zero interest, Baker said.

“It can be a terrific opportunity, but you [have] to use it wisely,” he said.

Personal Finance

What that means for you

Published

11 hours ago

January 29, 2025

Business Finance News

The Fed is clearly worried tariffs may be more inflationary than previously, says KPMG's Diane Swonk

The Federal Reserve announced Wednesday it will leave interest rates unchanged as inflation continues to run above the Fed’s 2% mandate.

The move comes after the central bank cut its benchmark interest rate by a full percentage point last year and in the wake of President Donald Trump‘s comment during his first week back in office that he’ll “demand that interest rates drop immediately.”

The latest CNBC Fed Survey showed expectations for only two rate cuts later in the year, the same number penciled in by Federal Reserve officials in their recent forecasts.

“While inflation concerns have significantly abated, they still remain,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. “As a result, it is quite possible that there will be fewer rate cuts over the course of next year than anticipated only a few months ago.”

For consumers struggling under the weight of high prices and high borrowing costs, that means there will be little relief to come. It also means Trump may further challenge the Fed’s independence.

Inflation has been an ongoing issue since the pandemic, when price increases soared to their highest levels since the early 1980s. The Fed responded with a series of interest rate hikes that took its benchmark rate to its highest level in more than 22 years.

On the campaign trail, Trump said inflation and high interest rates are “destroying our country.”

The federal funds rate, which is set by the U.S. central bank, is the rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

The spike in interest rates caused most consumer borrowing costs to skyrocket, putting many households under pressure.

Even though the central bank has already started cutting its benchmark rate and more rate cuts are on the horizon, consumers won’t see their borrowing costs come down significantly, according to Greg McBride, Bankrate’s chief financial analyst.

“The rate cuts are not going to be big enough or often enough to do the heaving lifting for you,” he said.

From credit cards and mortgage rates to auto loans and savings accounts, here’s a look at where those rates could go in 2025.

Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to more than 20% today — near an all-time high.

Annual percentage rates will continue to come down as the central bank reduces rates, but they are only easing off extremely high levels. With only a few potential quarter-point cuts on deck, APRs aren’t likely to fall much, according to Matt Schulz, chief credit analyst at LendingTree.

“Anyone hoping for the Fed to ride in as the cavalry and rescue you from high interest rates anytime soon is going to be really disappointed,” he said.

Try consolidating and paying off high-interest credit cards with a lower-interest personal loan or switching to an interest-free balance transfer credit card, Schulz advised: “A 0% balance transfer credit card can be an absolute lifesaver.”

Mortgage rates

Although 15- and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.

The average rate for a 30-year, fixed-rate mortgage is now just above 7%, according to Bankrate.

Going forward, McBride expects mortgage rates to “spend most of the year in the 6% range,” he said. But since most people have fixed-rate mortgages, their rate won’t change unless they refinance or sell their current home and buy another property.

Auto loans

Even though auto loans are fixed, payments are getting bigger and less affordable because car prices have been rising along with the interest rates on new loans.

The average rate on a five-year new car loan is 5.3%, according to January data from Edmunds compiled for CNBC.

“With the Fed signaling that any rate cuts in 2025 will be gradual, affordability challenges are likely to persist for most new vehicle buyers,” said Joseph Yoon, Edmunds’ consumer insights analyst.

“The average transaction price of a new vehicle remains near $50,000, driving average loan amounts to record highs,” he said. “Although further rate cuts in 2025 could provide some relief, the continued upward trend in new vehicle pricing makes it difficult to anticipate significant improvements in affordability for consumers in the new year.”

Student loans

Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by any Fed moves.

However, undergraduate students who took out direct federal student loans for the 2024-25 academic year are paying 6.53%, up from 5.50% in 2023-24. Interest rates for the upcoming school year will be based in part on the May auction of the 10-year Treasury note.

Private student loans tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means those borrowers are typically paying more in interest. How much more, however, varies with the benchmark.

Savings rates

While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.

In recent years, top-yielding online savings accounts have offered the best returns in over a decade and still pay nearly 5%.

“While the Fed putting the brakes on interest rate cuts stinks for those with debt, it is welcome news for savers,” Schulz said. “That means that it is still a really opportune time to shop for a high-yield savings account. Sure, you’ve missed out on the peak, but there are still plenty of good returns to be found.”