What stands behind variable CD rates?
In the past few years, numerous products have been released on the market by famous financial institutions and banks. These products can be used by the clients of these institutions in order to earn interest and save money. Even though there are plenty of methods that can be applied in order to save money, specialists recommend the credits of deposit. A credit of deposit is also known as CD and it can have both variable rates and fixed rates of interest.
A certificate of deposit can be described as a very useful banking product. By using this banking product, you pledge in leaving a certain amount of money (the amount of money is your decision) on a deposit. The deposit is used as exchange for obtaining a higher interest rate than the rate available with a checking account or a savings account. The difference between the interest rate obtained with the help of a certificate of deposit and an interest rate obtained with a savings account can be huge, depending on the financial institution you work with. A variable credit of deposit rate will change throughout the CD’s term; the term is the length of time during which the amount of money you established is deposited with the bank or the financial institution you chose.
What a newbie should know is that the indexed variable credit of deposit rates are being described by financial specialists as ‘’problematic’’. The problem appears whenever a rate established by the federal government falls. Let’s take, for example, the Federal Prime rate; if this falls, then the interest rate also falls. However, whenever the rate rises, the interest rate rises too. Let’s make a simple mathematic calculation in order to better understand how the interest rate and the variable credit rate can affect you. For example, imagine that you have a credit of deposit based on prime; of course, the credit of deposit is a variable one. If the prime is paying you 10 percent, then the credit of deposit is paying you the prime, as well as a plus of 1 percent. This means that the credit of deposit is paying you 11 percent. If the prime falls to 5 percent, then the credit of deposit falls to 6 percent. The difference should be taken into account, as it is not a small one!
A huge advantage offered by the indexed variable credit of deposit is represented by the fact that there are financial institutions that will allow their clients to withdraw the money before the end of the term. No penalty is going to be charged if the withdrawal is done as result of the fact that the interest rate fell much below an established percentage. The credit of deposit rates are sustained by the government, which means that a person interested in such a deposit can take advantage of an insured certificate as long as he or she choose a financial institution approved by the government. This is great for those who want to be 100% sure that their money is safe.