Higher Interest Rates Are Not Always Better

Last week’s news of IndyMac’s financial problems has sparked at rush of people closing their accounts and pulling their money out of this popular financial institution. IndyMac’s stock has plummeted to almost zilch and customers are not happy about that. One of the main benefits that the bank was offering, however, was a high CD interest rate. In fact, it was one of the highest CD rates in the entire country!

IndyMac is just one example that the highest CD rates are not always better. Many times, banks will offer high interest rates in return for attracting new customers. But IndyMac isn’t the only one that has been known to do this. Countrywide did the same thing last year by offering one of the highest interest rates in California. Recently, however, Bank of America had to rescue Countrywide because they were hurting for money. The reason this happens so often is because some banks use the new money that comes in from the new CDs in order to pay off old debts or interest to other customers. It’s similar to the Ponzi scheme that Bernie Madoff is doing time for in the iron city.

Luckily, the majority of Americans investing their money in CDs do not have to worry about losing their shirts if the bank in which they have their money invested goes under. The FDIC, or Federal Deposit Insurance Corporation, insures the money up to $100,000 so if you have less than that invested in the bank, you should be protected. When the bank fails, the FDIC moves your money to another bank or financial institution where you still have access to it. One bad thing about that is that the new bank is not required to offer the original interest rate from the previous agreement. In those cases, you could be losing some money overall.

Another bad thing about investing in CDs through shaky banks is that the banks that need the money are not worried about paying out the interest rates. When the bank goes under, the FDIC uses the government’s money to cover those assets. That means the cost gets passed on to the taxpayers. If several banks fail within a short period of time, that could be disastrous to the economy over time.

There are two things to keep in mind if you find decent CD rates at a bank. For one, make sure the bank is FDIC insured so your money is protected. That’s most important. Also, use your judgment. If a bank’s CD interest rates seem too good to be true, they probably are. Look for a bank offering a rate that is more like the norm to keep you money in good shape.