When is a CD not a CD? When it’s a savings account in disguise.
Traditionally, certificates of deposit have offered a trade-off: in return for the bank’s guarantee of a fixed interest rate, you promise to leave your money with the bank for a specific term. If you renege and withdraw your funds early, you pay the bank a fee equivalent to some portion of the interest you would have earned. In some cases this can result in a net loss: take the case of a six-month CD with a three-month interest penalty; if you withdraw your money after just one or two months, you’ll have less than you started with.
Ally Bank, which up until last month was GMAC, offers a ‘no-penalty’ 9-month CD. Just like any other CD, it has a guaranteed interest yield. Unlike any other CD (or, um, other common 9-month investments), you pay no penalty for early withdrawal. The result is that it functions almost exactly like a long-term savings account with a nine-month guaranteed interest rate. There are just two minor differences:
- you cannot withdraw your money within the first six days after opening the account, and
- you cannot withdraw only part of the CD amount; rather it must be treated as a lump sum.
I spent a fair bit of time looking for the catch here, and couldn’t find one. This appears to be a genuine no-lose situation for customers. If interest rates continue to decline, you’ve got yours locked in. If they rise, you just take your money out and put it somewhere else — even another no-penalty CD. Ally compounds interest daily, so you will always receive the full amount earned through the date of your withdrawal.
The current rate on this 9-month CD is 2.30% APY. I checked Bankrate to compare against all savings account rates as well as CD rates for terms up through one year; the only current product that beats the no-penalty CD is Ally’s own one-year traditional CD, at 2.35%.
Ally’s current Bankrate rating is 3 stars, or ‘performing’, with a predictive indicator to ‘improve’. (I note that no banks currently have a 5-star rating, the highest right now is 4, ‘strong’.) Despite pressure from the FDIC to lower their rates, Ally still consistently appears in the top five spots on Bankrate for both savings accounts and short-term CDs.
I opened my first savings account with them in May of last year, when they were still GMAC, due to their top rates. I also took out a 6-month CD with them this winter.
One of the reasons I’ve shied away from CDs in the past is the hoops that some banks make you jump through to stop the balance from rolling over into a new CD when your current one matures — often written notice is required. Ally executes these instructions easily over the phone. (I happened to call about my CD on the first day after the name change, which had to be a time of maximum stress for their customer service people, yet the fellow I spoke to was both friendly and efficient.)
I have in fact thus far had impeccable customer service from GMAC/Ally at every turn. Their web site is easy to use. Phone support is now available 24/7 and seems to be US-based. Their new branding campaign suggests they’re aiming for the same niche in which ING Direct operates, but with consistently better interest rates than ING offers. The good customer service gives me hope that it’s not merely a marketing ploy, but an actual commitment to customer experience.
(Photo by bettina n.)
J.D. at Get Rich Slowly recently opened up a discussion about chasing interest rates on savings accounts. The range of comments are pretty interesting, but the one recurring theme is that most people are willing to stay with a slightly lower rate as long as they’re happy with the service and convenience.
I guess I fall into the rate chaser category, at least up to a point. But like a lot of GRS commenters, my decisions have at least as much to do with emotions as finances.
I have opened savings accounts at three different banks in search of the best rate; two of them currently sit empty. Right now, having just made the month’s mortgage payment, we have $22K in savings. $15K of that is our minimum ‘emergency fund’, enough to hold us for three months in the unlikely event Jak and I both suddenly lost our jobs. Amounts above that are collected and spent on lump-sum Roth IRA deposits (I’ve done mine for the year but we still need $5K for Jak) and house remodeling projects.
Up until this week, I had about $18K in a Countrywide savings account and the rest at Washington Mutual. WaMu had a lower interest rate, but because our checking account is with Washington Mutual, transfers to savings are instant. I can keep our joint checking account (which earns no interest) at a low balance and move the excess from each paycheck into savings — even if only for a week or three, until the mortgage is due.
I opened the Countrywide account less than four months ago, when my 6-month CD expired and I was looking for a good savings rate. At the time, they were paying 4% APR, noticably higher than almost anyone else. In just three months, that rate had fallen to 3.55%, which was barely above the steady 3.5% being paid by HSBC, who holds my other currently empty savings account.
I had already decided that if Countrywide fell to 3.45%, I would transfer the balance to my existing HSBC account, despite the hassle of figuring out the login info for an account I haven’t used in a year and a half. But this was as much an emotional decision as a financial one — I’ve been feeling a bit disgruntled with Countrywide, and was looking for a reason to put our little sum elsewhere. (Countrywide holds our mortgages, and had rated pretty darn low on my customer service scale even before I opened the Plummeting-Rate Savings Account. I made nine calls — NINE — before someone was finally able to link both of our mortgages to the same online account. Took well over a year.)
If I’d been happy with Countrywide, I wouldn’t have bothered. And I wasn’t unhappy enough with Countrywide to open up a whole new savings account at another bank for the same .05% gain — the activation energy wasn’t there.
All of this was made moot, however, when last week WaMu upped its savings account rate from 3.3% to 3.75%. Interest was about to post to the Countrywide account, so I held it for an extra day to the end of the month, and then boom — over to WaMu. Took me about thirty seconds to make the shift.
Until just now, I hadn’t even bothered to work out the math for what this move is netting us in interest, which I suppose is an indication right there that it’s not all about the numbers. Turns out I’m only making about $3.30 a month extra at those rates (though with the way Countrywide is going, I expect the gap to increase). That’s like … not even a vanilla latte for Jak.
But again, there’s an emotional component. I’ve been a WaMu customer for over a decade now, and they’ve generally been good to me, especially at the local branch level. When we were trying to get paperwork together for home loan qualification two years ago, the manager of one local branch expertly wrangled WaMu Corporate Bureaucracy on our behalf, earning our undying gratitude.
Struggling banks — including Countrywide and WaMu — are tending to top the charts on interest rates, in a presumed effort to draw more customers. Looks to me like they’d do better to offer a merely good rate and spend the difference on improving customer service and experience!
