Certificates of deposit (CDs) are often seen as a safe and reliable way to grow savings. In normal times, they usually pay more interest than regular savings accounts. But during the COVID-19 pandemic, CD rates dropped to unusually low levels, frustrating many savers.
If you’re wondering why this happened and what to do with your money when CD rates are weak you’re not alone. Understanding how interest rates work and how banks operate can help you make smarter decisions, even in a low-rate environment.
How Banks Earn Money (and Why That Matters for CDs)
At their core, banks and credit unions are in the business of borrowing and lending money.
When you deposit money into a savings account or CD, the bank pays you interest. Then, the bank lends that same money to other customers such as homeowners, car buyers, or credit card users at much higher interest rates. The gap between what the bank earns and what it pays out is how it makes a profit.
For example:
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A saver might earn less than 1% interest on a CD.
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A mortgage borrower might pay over 5% interest.
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A credit card user might pay 20% or more.
That difference, often called the “interest spread,” is the bank’s main source of income.
Banks also make money through account fees, overdraft charges, and specialized services, but lending remains the foundation of their business.
Where CDs Fit Into the Picture
A CD is a type of deposit where you agree to leave your money with the bank for a fixed period, such as six months, one year, or five years. In exchange, the bank usually pays a higher interest rate than a standard savings account.
Because your money is locked in, the bank can confidently use it to fund loans. If you withdraw early, you typically pay a penalty, which further protects the bank and encourages long-term deposits.
From the bank’s perspective, CDs are a stable and predictable source of funding.
What CD Rates Look Like in a Normal Economy
In a healthy economic environment:
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Short-term CDs usually pay slightly more than savings accounts.
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Longer-term CDs pay higher rates because you’re giving up access to your money for a longer time.
For example, money locked away for five years would normally earn much more than money you can access at any moment. This reward for patience is what makes CDs appealing to long-term savers.
CD rates also tend to follow broader interest rate trends. When overall rates rise, CD yields usually increase. When rates fall, CD earnings shrink though not always immediately or evenly across banks.
Why Some Banks Pay More Than Others
Not all banks behave the same way. Smaller banks and online institutions often offer higher CD rates than large national banks. That’s because:
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Big banks rely on brand recognition and branch networks to attract deposits.
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Smaller banks may need to offer higher rates to compete.
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Online banks have lower overhead costs and can pass savings on to customers.
During the early months of the pandemic, some banks raised CD rates temporarily to attract deposits quickly, especially when they expected strong demand for loans.
What Happened to CD Rates During COVID-19
In March 2020, the Federal Reserve took emergency action to support the economy by cutting its benchmark interest rate to near zero. This move was meant to encourage borrowing, spending, and investment during a period of extreme uncertainty.
Once the Fed lowered rates, banks quickly followed by slashing interest rates on savings accounts and CDs. Since banks could borrow money cheaply and loan demand was uncertain, they had little incentive to pay savers higher returns.
The Fed also signaled that rates would stay low until the economy showed clear signs of recovery. Combined with government stimulus programs and business relief efforts, this created a prolonged period of low interest rates.
As a result, CD rates across the country sank to historic lows.
What Savers Can Do in a Low-Rate Environment
Even when CD rates are disappointing, there are still smart ways to manage your cash.
Use a CD Ladder
A CD ladder spreads your money across multiple CDs with different maturity dates. For example, you might invest in one-year, three-year, and five-year CDs at the same time.
This approach:
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Gives you regular access to cash
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Reduces the risk of locking everything in at the wrong rate
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Allows you to reinvest at higher rates if interest rates rise
Look at No-Penalty CDs
Some CDs allow you to withdraw your money early without a fee. These can be useful if you want to lock in today’s rate but still keep flexibility in case rates increase or you need cash.
Compare Banks Carefully
Even in tough times, some banks offer better CD rates than others. Online banks and credit unions are often the most competitive, so shopping around can make a real difference.
Consider Other Account Types
If CDs aren’t appealing, you may find better returns elsewhere. Some checking accounts offer high interest rates if you meet certain requirements, such as setting up direct deposit or using your debit card regularly. While these accounts often have limits, they can still outperform CDs in a low-rate market.
The Bottom Line
CD interest rates dropped during the pandemic because the Federal Reserve pushed rates near zero to stabilize the economy. While this was good for borrowers, it made life harder for savers.
If rates stay low, flexibility and diversification matter more than ever. By understanding how CDs work and exploring different strategies, you can still make thoughtful choices with your savings even when the returns aren’t exciting.
