Are Variable-Rate CDs Worth It? Learn About 4 Pitfalls

While a variable-rate certificate of deposit can offer some advantages, be certain to understand four critical drawbacks.
Financial Expert
Managing Editor
twitter facebook
unhappy women reading bank statement

A variable-rate certificate of deposit (CD) is not new, but it may seem like an especially appealing concept in today’s relatively low-interest-rate environment. Unfortunately, the numbers behind these products don’t always add up to a good deal for savers.

What Is a Variable-Rate CD?

While most CD rates are fixed for the length of the term, variable-rate CDs have interest rates that can change, either according to a prearranged formula based on an index or at the customer’s option when rates rise. A couple of factors make these accounts seem compelling:

CD Rates Remain Low

According to recent FDIC figures, the average rate for a one-month CD is just 0.09 percent, which is lower than the average rate for money market accounts, which is 0.13 percent.

The Time Premium Has Almost Disappeared

If you are willing to commit to a longer-term CD, you are generally compensated for that commitment at a higher rate. However, this premium for longer commitments is still somewhat small. The average rate for a two-year CD is 0.6 percent, according to the FDIC.

A variable-rate CD can be a way of making sure you do not find yourself locked into low rates in the event that rates rise.

Which Banks Have the Best CD Rates?

Hundreds of banks offer CDs, and there’s fierce competition among them to offer the best rates. Use our curated list below to find the best CD for your financial goals.

The Trouble With Variable-Rate CDs

Though the idea of flexibility sounds good right now, the numbers offered on variable-rate CDs don’t necessarily add up in your favor. Here are four reasons why:

You May Pay a Price for Variability

CDs that give you the option of a “bump-up” in rates if yields rise before the CD term expires generally make you pay for that option in the form of a lower initial rate. When you compare these rates with standard CD rates, you may conclude that the option is not worth the price.

Early Withdrawal Penalty May Be Cheaper

It depends on the size of the penalty, but in some cases, the early withdrawal penalty on a CD represents just a few months’ interest. That may turn out to be less than the cut in rates you would get on a bump-up or adjustable CD, and you would only pay the price if rate changes made it worthwhile.

Adjustable Value Decreases with Time

If you do accept a lower initial rate, keep in mind that the longer it takes for rates to rise, the less valuable the bump-up or adjustable option becomes. The more time goes by, the longer you are stuck in a substandard rate, and the less remaining time you have to benefit from a rate bump.

Losing Ground to Inflation

Indexed CDs may tout the fact that your principal is guaranteed, so the worst that can happen is that you earn no interest if the index does not move in your favor. However, earning no interest while inflation creeps forward is effectively the same as losing money.

Most types of financial instruments are not inherently good or bad — it is the specific terms that determine how favorable they are. So if you consider a variable-rate CD, make sure that the numbers allow that idea to work for you over the time horizon you expect to hold the CD.

Richard Barrington, a Senior Financial Analyst at MoneyRates, brings over three decades of financial services expertise to the table. His insightful analyses and commentary have made him a sought-after voice in media, with appearances on Fox Business News, NPR, and quotes in major publications like The Wall Street Journal and The New York Times. His proficiency is further solidified by the prestigious Chartered Financial Analyst (CFA) designation, highlighting Richard’s depth of knowledge and commitment to financial excellence.
Our reviews are unbiased and thorough, focusing on consumer needs. For details, see our Editorial Policy & Methodology.