How to fight low CD interest rates

By Maryalene LaPonsie

Not as flashy as the stock market and less flexible than money market accounts, it's easy to overlook CDs as an investment tool. But you should think twice before you count CDs out of your financial strategy.

Like the tortoise, these accounts use a slow-and-steady approach to build wealth. But that doesn't mean you have to settle for the pathetically low CD interest rates so common today. Instead, find the best CD rates available by following these simple tips.

1. Invest more

Not surprisingly, many banks will give you a better interest rate if you give them more of your money. Almost all banks pay higher CD interest rates for larger deposits, but if you don't want to tie up too much money in a CD, some banks will also increase rates if you strengthen your relationship with the institution. You may be eligible for preferred rates if the total of all your investments – including checking and savings accounts – reaches a certain level.

Check with your institution for their specific policies. Then determine whether it makes sense to consolidate your accounts at one bank or pull some extra money to invest in a CD. If you do put more into a CD, make sure you don't place your entire savings in the certificate. It is important to maintain some fluid savings that can be quickly accessed in case of an emergency.

2. Go long

Another near-universal truth of CDs is that the longer the term, the higher the interest rate. Since a CD ties up your money for a specific length of time, banks are willing to pay a little extra to ensure you – and your dollars – stick around awhile longer. While a longer term can increase your CD interest rates, you should carefully consider your savings goals and financial situation. Again, the last thing you want is to have to pay a penalty to get to your money when you need it.

3. Build a ladder

One way to take advantage of the higher interest rates offered by longer terms without losing access to too much of your money is to create a CD ladder. These are created by investing money in multiple CDs that will reach maturity at varying times.

For example, if you have college-age children and expect to need money for tuition twice a year, you could create a ladder schedule that will allow one CD to mature every six months. Laddering can be an effective way to create a predictable cash flow while taking advantage of the best CD interest rates available.

4. Look for bump potential

Traditional CDs offer fixed rates which pay out interest at the time of maturity. However, some CDs offer the opportunity to increase your rates one or more times during the term. These products may go by different names, such as step-up CDs or bump-up CDs. Some may automatically increase rates at specified intervals while others allow you the opportunity to make a one-time adjustment when interest rates rise.

Before signing up for one of these non-traditional CDs, do your homework. Specifically, be sure the CD offers a competitive initial rate. Some banks may offer lower rates at the start of the term that offset any future gains. In addition, the Securities and Exchange Commission cautions that some long-term, high-yield CDs have "call" options that allow banks to terminate the CD after a fixed amount of time. Make sure you fully understand the terms to ensure you are getting the best CD for you.

5. Take to the Internet

You don't have to limit yourself to the neighborhood bank when it comes to purchasing a CD. Compare CD rates from a number of institutions, online banks included. Some of the best CD rates can be found at online banks where low overhead costs often translate into more favorable terms for investors. In addition, online banking rates aren't only higher for CDs. They may also be best for checking and savings accounts. With online services expanding and easy access to ATMs in many parts of the country, switching to an online bank is no longer such a radical move.

While they may often be overlooked, CDs remain an viable addition to virtually any investment portfolio. And spending a little time on research is all it takes to find the best CD rates.