There's a reason most banks don't promote their CD rates: They're horrible. The average rate for a one-year CD last week was 0.44 percent, according to Bankrate.com. Most big banks are paying less than 1 percent on their savings accounts.
Here's a look at some of the alternatives, along with the drawbacks:
Long-term CDs
The average rate for a five-year certificate of deposit is 1.64 percent, according to Bankrate.com., and some banks are paying up to 2.36 percent.
About 13 percent of banks charge investors one year's interest if they cash out a five-year CD before maturity, according to Bankrate.com.'s 2010 CD survey. In addition, some CD contracts give banks the right to increase penalties before your CD matures. McBride predicts that more banks will increase their early withdrawal penalties to discourage early cash-outs.
A hefty early withdrawal penalty could vaporize your interest, and some of your principal, too.
Bump-up CDs
These long-term CDs allow you to increase your rate before the CD matures if overall rates rise. Last week, for example, Ally Bank introduced a four-year "Raise Your Rate" CD that allows investors to increase their rate twice during the term if interest rates rise.
In many cases, though, CDs with a bump-up option have a lower initial rate than comparable CDs that don't offer that feature, McBride says. "Because you have some flexibility on the back end, you're going to trade away some return on the front end," he says.
I Bonds
Investors who purchase an inflation-adjusted Savings Bond, or I Bond, between now and Oct. 31 will earn a combined rate of 4.6 percent for six months. That's bound to get a lot of investors' attention, but this great rate could be ephemeral.
I Bonds consist of two components: a fixed rate that stays the same for the life of the bond, and an inflation rate that's adjusted every six months. The I Bond issued in May has a 4.6 percent inflation rate, reflecting the spike in gas prices between September 2010 and March 2011, and a 0 percent fixed rate.
"The headline return is only in effect for six months," he says.
Rewards checking accounts
The average interest rate for a rewards checking account is 2.56 percent, according to a survey released last week by Bankrate.com. That's down from the 3.3 percent average a year ago, but considerably higher than the average rate for a five-year CD. And unlike a long-term CD, you can withdraw your money at any time without paying a penalty.
But to earn these rates, you must meet rigorous requirements. Most banks and credit unions that offer these accounts require you to use your debit card at least 10 times a month.
Another downside: Most of these accounts limit the amount of money eligible for their rewards rates. The caps typically range from $10,000 to $25,000.
Online savings accounts
Investors who are unable to jump through the hoops required by rewards checking accounts can still boost their interest rate by banking online. Average rates for online savings accounts are five times higher than rates at traditional brick-and-mortar banks, according to MoneyRates.com. On a $10,000 balance, online banks offered an average of 0.87 percent, vs. 0.15 percent for a traditional "offline" savings account, according to the survey.
As long as your deposit is insured by the Federal Deposit Insurance Corp., you won't take on any additional risk by banking online, says Richard Barrington, personal finance expert for MoneyRates. You can link your online savings account to a checking account at a traditional bank and use the latter for routine transactions, such as ATM withdrawals, he says.
It's a sad state of affairs when an investment offering a 1 percent rate is considered a good deal.
