A certificate of deposit is traditionally a worthwhile, low-risk investment. However, CD rates have been so low lately that many consumers have moved their money into more productive financial ventures, reports Bankrate. Paying down debt – particularly credit card debt – has taken center stage.
One-year CD rates scraping the bottom
According to Bankrate, the current average for one-year CD rates is a miniscule 0.44 percent. The highest surveyed was 1.31 percent. Considering that credit cards typically carry an APR of 20 percent or more, a paydown is attractive. U.S. consumer credit card debt still exceeds $790 billion, despite significant shrinkage since 2004, reports the Federal Reserve. That explains why CD balances have fallen to a six-year low of $839.2 billion.
This isn’t a new phenomenon. Market Rates Insight notes that such a shift was apparent in September 2010. From Jan. 1, 2010, to June 30 of the same year, the average monthly CD amount declined by about $3 million. Of the amount that was not rolled over, surveys indicate at least 15 percent was used to pay down credit cards. The rest went into liquid accounts like checking, savings and money markets.
Demand for liquid accounts is high
The Credit Union National Association’s June Credit Union Trends Report found that highly liquid accounts are desirable to consumers looking to eliminate debt. Regular share accounts, money markets and share draft accounts have all seen greater activity since April 2010: a 128-percent total savings increase. The $834 billion in total savings reflected a $35 billion (4.4 percent) increase since April 2010, writes Credit Union Times. CDs dropped 5.2 percent over the same period. These results are consistently below historical trends and suggest that the U.S. is still firmly in the grip of economic uncertainty.
Dave Colby, the chief economist at Credit Union National Association Mutual in Madison, Wis., sees the writing on the wall.
“From a member perspective, households are rational and will continue to pay down higher-cost debt obligations versus building savings, which are losing ground to inflation,” he said.