Is CD maturing soon? Avoid this costly trap, and make four smart moves before the Fed cuts rates

A costly CD mistake that can lock you in with a poor rate

When your certificate of deposit (CD) approaches maturity, you face a deadline to decide what will happen to your money. Take no action, and your bank will likely transfer it to a new CD — a move that can hurt you in two ways.

First, renewable CDs rarely offer competitive rates. Banks typically resort to one option, which often pays much less than the best CD returns available elsewhere.

Second, an automatic extension may double your commitment. A one-year CD can become two, and a two-year CD can become four – locking up your money in a period that may not suit your goals. If you need access before the CD expires, an early withdrawal penalty will apply.

The good news: You can avoid this costly trap by planning ahead. Taking control before maturity allows you to avoid being stuck with a poor CD price and an unwanted term, and instead choose the option that best suits your needs.

4 Smart Steps to Take Before Renewing Your CD

Step 1. Decide: New CD or More Flexibility?

If you’re hesitant to hold another CD because you may need to access your money soon, a high-yield savings account may be a better alternative. The best accounts currently pay between 4% and 5%, providing a solid yield with full access to your money when you need it.

But with the Federal Reserve expected to cut interest rates again next week, savings account yields are expected to decline. This means that today’s returns are unlikely to continue, with all major accounts paying less in the weeks and months ahead.

This is where the new CD comes into play. If you don’t need immediate access to your money, opening one of today’s best CDs guarantees the advertised Annual Percentage Yield (APY) until maturity. No matter how many times the Fed cuts interest rates, your CD rate will be locked.

Step 2. Compare your bank’s renewal rate with the best CDs available today

When your bank or credit union notifies you about an outstanding CD, they’ll show you the renewal option they offer — with the exact term and price. But before you simply accept it, it’s worth comparing what’s available elsewhere.

See our list of the best CDs nationwide and compare top prices. You’ll see the best APYs available right now and how rates stack up over different periods, so you can choose the CD that best suits your goals.

Step 3. Exceed the deadline before automatic renewal starts

Several weeks before your CD is due, your bank or credit union will send instructions on how to direct your funds. You may receive a response form, envelope, or directions to use online or telephone banking.

If you’re undecided, the safest step is to tell the bank – before the deadline – to transfer your balance to a savings account, either at the same institution or in the account you’ve linked. This way, your money remains flexible and easy to move later, no matter what you decide.

Even if you know you want another CD — either at the same bank or another — you’ll be able to easily open it using the money that was first stored in savings.

Step 4. Plan your next CD strategy to maximize profits

If you decide to open a new CD, act quickly to get the best rate for a term that suits your financial goals. With CD yields already falling and another Fed cut likely, moving sooner increases your odds of getting a higher APY.

Also, if your current CD doesn’t mature for another month or two, but you have extra money that will allow you to double commit for a short time, consider opening a new CD now instead of waiting. This way, you may be able to secure a stronger price than might be available after your existing CD matures.