What Is a Promotional Certificate of Deposit (CD) Rate?

A promotional certificate of deposit (CD) rate, also known as a bonus CD rate, is a special interest rate offered by banks and credit unions to attract new deposits. This promotional rate is typically higher than the standard rates but may only be available for specific deposit amounts or limited time periods.

Key Takeaways:

• Promotional CD rates are commonly offered for short-term CDs and require a higher minimum investment.
• Bank CDs are insured for up to $250,000 per deposit by the Federal Deposit Insurance Corp. (FDIC).
• Upon maturity, a promotional CD usually renews into a standard CD with the standard posted rate.

How a Promotional Certificate of Deposit (CD) Rate Works

Promotional certificate of deposit rates are typically offered for short-term CDs and require a higher minimum investment. These CDs assure a minimum rate of return and are backed by insurance from the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 per individual at banks. Similarly, credit unions offer share certificates, their version of CDs, with insurance coverage up to the same amount through the National Credit Union Administration (NCUA).

At maturity, promotional CDs transition into standard CDs at the standard posted rate rather than the promotional rate, though financial institutions may provide incentives to encourage investors to continue with a higher rollover rate. Promotional rates are mainly used to attract new customers or increase CD purchases from existing customers.

Certificates of Deposit (CDs) Explained

A certificate of deposit is a savings certificate with a fixed maturity date and interest rate issued in varying denominations, subject to minimum investment requirements. Term lengths range from a few days to a decade, with the standard range being three months to five years. Generally, CDs offer higher rates than savings accounts, with online banks often providing the most competitive rates.

Most CDs come with fixed rates, ensuring that the annual percentage yields (APYs) remain constant throughout the term. While CDs may renew automatically upon maturity, the principal and interest can be withdrawn, subject to penalty fees based on the CD’s duration and the issuer. Withdrawal penalties typically equate to a portion of the interest earned, and such penalties are not covered by FDIC or NCUA insurance.

Fixed-rate CDs guarantee locked APYs, offering higher yields compared to savings accounts. For instance, a five-year CD with a 2.50% APY could yield about $625 on a $5,000 deposit, outperforming a savings account with a 1.50% rate, which would earn approximately $375 on the same deposit. Therefore, CDs typically offer superior returns over high-yield savings accounts.

Can My Rate Change During the Term of My Promotional CD?

Just like regular CDs, promotional CD rates remain fixed throughout the deposit term. However, some financial institutions provide step-up CDs that offer incrementally higher interest rates at specific intervals within the term, easily distinguishable by their increasing rates.

Are Promotional CDs Subject to Early Withdrawal Fees?

Yes, all CD accounts, including promotional CDs, incur withdrawal penalties for early fund withdrawals. The penalty amount is outlined in the deposit agreement. Some CDs may offer penalty-free withdrawals or liquid CDs as additional incentives.

Does the Interest Rate Change Once My Promotional CD Term Ends?

After the promotional CD term concludes, the interest rate may change, as the promotional rates are generally applicable only for the initial term. Financial institutions may offer a higher rollover rate or revert to the standard term rate for subsequent periods.

The Bottom Line

Promotional CD rates provide an opportunity for savers to benefit from elevated interest rates for longer terms and higher minimum deposits. It is essential to review all terms, as early withdrawal penalties can offset potential earnings if the term is extended, and rollover rates tend to be lower. Engaging with promotional CDs requires careful consideration to maximize returns and align with financial goals.