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Get your CDs while the going's not that bad

By Peter McDougall of manybanking.com

Banks entice consumers to deposit more money by boosting the yields on the certificates of deposit (CDs) they offer. But today's 0.75 percentage point cut by the Federal Reserve will undoubtedly limit how high banks are willing to go with the yields they offer. CD rates have fallen steadily since the economy took a downturn this fall.

Despite this drop, CD interest rates are still higher than most other short-term, low-risk options available to consumers. Currently, six-month CDs pay a national average of 1.87%, compared to 0.38% on savings accounts and 0.82% on money market accounts, according to data from manybanking.com.

If you’re ready to check out CDs, here are some tips to finding the best deals -- and making sure your money is safe.

Shop around: To find the best CD rates, make sure you comparison shop. There is a good deal of variability between institutions because banks set their own rates. For instance, rates on six-month CDs in New York range from as high as 4.0% at the Hudson Valley Credit Union to a 2.1% offer from Bank of America (ticker: BAC). And while nationwide rates on one-year CDs currently average 2.24%, rates in California range from as high as 7% from the Central State Credit Union to a 3.6% offer from Wachovia (ticker: WB).

For rates offered near you, check out manybanking.com’s CD section and enter your ZIP code. Also consider CDs from online banks, which frequently offer higher rates than traditional brick–and-mortar banks because of their lower overhead. And be sure to take a look at the details of the CD offer -- a higher minimum balance is sometimes required to qualify for the advertised rate.

Choose the right duration: Rates increase as the term of the CD increases. And while the higher rates are nice, bear in mind that your cash will be locked up for the CD’s term, whether three months or five years. Therefore, choosing the right CD includes considering when you'll need that money. For instance, if you are planning on buying a car next summer, consider stashing your cash in a six-month CD. Alternatively, if you are saving up for a big vacation in a few years time, consider buying a three-year CD (such as the 2.75% 36-month CD offered by TD Banknorth (ticker: BNK) in Massachusetts). If you plan on retiring in five years and won't need the money until then, consider a five-year CD, which currently average 3.16%.

If you aren't sure when you'll need the money, consider building a CD ladder. A ladder allows you access to a portion of your cash at set intervals, while allowing you to benefit from longer-term rates. (For more on CD laddering, click here.)

Know your risks: Much like the stock market, it's difficult to predict where CD rates are headed. Best advice: Buy the CDs most suited to your investment goals. And if you need access to the money before the CD matures, you could end up losing out on interest -- and potentially even some principal -- through early-withdrawal penalties. On the upside, however, your money is safe in the event that your bank fails. The Federal Deposit Insurance Corp., or FDIC, covers up to $250,000 per accountholder per institution. Before you buy a CD, make sure your bank is insured by the FDIC or your credit union is insured by the National Credit Union Share Insurance Fund.

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