What Is a Promotional Certificate of Deposit (CD) Rate?
A promotional certificate of deposit (CD) rate, also referred to as a bonus CD rate, is a higher-than-normal rate of return on a CD offered by banks and credit unions to attract new deposits. Often this promotional rate is limited to certain deposit amounts or for certain short periods.
- Promotional CD rates generally are offered for short-term CDs and require a higher minimum investment.
- Bank CDs are insured for up to $250,000 per deposit by the FDIC.
- At maturity, a promotional CD usually renews into a standard CD of the same maturity with the standard posted CD rate.
How a Promotional Certificate of Deposit (CD) Rate Works
Promotional certificate of deposit rates generally are offered only for short-term CDs and require a higher minimum investment. Like all CDs, they guarantee a minimum rate of return and provide the security of insurance from the Federal Deposit Insurance Corporation (FDIC) of up to $250,000 per individual at banks. Share certificates, which are the credit union version of CDs, are also low risk, as they are insured up to the same amount through the National Credit Union Administration (NCUA).
At maturity, promotional CDs renew into a standard CD of the same maturity, with the standard posted CD rate instead of a promotional rate. However, institutions may offer investors incentives to stay invested by offering a higher rollover rate than a new CD would yield. Promotional rates are used to lure new customers or entice existing customers to purchase more CDs.
Certificates of Deposit (CDs) Explained
A certificate of deposit is a savings certificate with a fixed maturity date and fixed interest rate issued in any denomination considering minimum investment requirements. Term lengths can be as short as a few days or as long as a decade, but the standard range is three months to five years and the longer the term length, the higher the interest rate. CDs typically pay higher rates than savings accounts. CDs with higher rates earn higher yields. Online banks tend to have the most competitive rates.
Most CDs come with fixed rates, meaning annual percentage yields are locked in for the duration of the term.
CDs may automatically renew upon maturity, or, at maturity, the principal plus interest earned is available for withdrawal. A CD is a time deposit that restricts holders from withdrawing funds on demand. An early withdrawal penalty is charged depending on the duration of the CD and the issuing institution. Typical early withdrawal penalty fees are equal to an established amount of interest. FDIC and NCUA insurance doesn’t cover penalties incurred by withdrawing money early.
Most CDs come with fixed rates, meaning annual percentage yields are locked in for the term. A five-year CD with a 2.50% annual percentage yield (APY), for example, would earn around $625 on a $5,000 deposit. In a savings account that earns a rate of 1.50%, the same deposit amount would earn about $375. In this scenario, a CD would earn more than 1.5 times what a high-yield savings account would earn.
Can my Rate Change During the Term of my Promotion CD?
Just like regular CDs, rates are locked on promotional CDs for the term of the deposit. Some banks and credit unions offer step up CDs that offer a higher interest rate at certain points in the term. Step-up CDs will be easily identified by their increasing interest rate.
Are Promotional CDs Subject to Early Withdrawal Fees?
Yes. Since CDs are time deposits, all CD accounts will have a penalty for withdrawing funds early. The amount of the penalty will be disclosed in the deposit agreement. Some CDs will offer a penalty-free account as another type of incentive. These accounts are also called liquid certificates of deposit.
Does the Interest Rate Change Once my Promotional CD Term Ends?
Yes. Most promotional CD rates are valid only for the term of the original agreement. After that period of time, the rate will likely change unless there is a stipulation on the account. Many promotional CDs will offer a higher rollover interest rate than what would otherwise be offered as a perk of opening the account. Some will revert to whatever the rate is for that term length and balance at the time.
The Bottom Line
Promotional CD rates can allow savers to take advantage of much higher rates than usual for longer terms and higher minimum opening deposits. Just make sure to read the fine print—early withdrawal penalties can negate any earnings if the term is too long and rollover rates are typically much lower.