Tempting CD rate? Do your homework first

Monday, June 22, 2009

Consumer Action has learned that the Federal Deposit Insurance Corporation (FDIC) has received inquiries and complaints about certain companies advertising above-market interest rates for FDIC-insured certificates of deposit (CDs). Some of these ads display the FDIC logo or state "FDIC Insured."

A CD is an investment. Depositors can purchase CDs in various denominations (or face values) from banks and investment companies. In return depositors are provided with a certificate from the bank stating that they (or other named party) has a specified sum on deposit, usually for a given period of time, and will earn a specific, fixed rate of interest during that time.

Beware, for many of these companies are not FDIC-insured banks. They are insurance or financial service companies that sell non-insured financial products. The small print in the ads may state that the company is not an FDIC-insured financial institution.

The advertised CDs generally offer above-market interest rates for only a short term, require a minimum amount, and insist that the customer visit a company office. The goal of the ads are to attract consumers for the company's non-deposit products or services.

If a customer asks to purchase the advertised CD, the company will direct the customer to a computer terminal in the company’s office to purchase a CD from an FDIC-insured financial institution that accepts Internet deposits. The CD will be offered at a rate lower than advertised. The company typically writes a separate check to the financial institution for the difference between the bank’s rate and the advertised rate for the term of the CD. Both checks are mailed to the bank, and the bank then issues the CD for the increased amount, but at the bank’s lower interest rate.

The FDIC recommends that you:

• Carefully consider whether non-insured products are appropriate for your personal financial situation.
• Understand the terms of any CD they purchase.
• Research deposit interest rates at trustworthy web sites, such as Bankrate.com.
• Verify whether identified financial institutions are FDIC-insured on the FDIC web site.
• Read official information about FDIC deposit insurance coverage on the web site.

Click here to visit the FDIC home page. (En Espanol.)