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With online banks cutting interest rates, should you get a CD?

Online savings accounts are cutting interest rates.
Twenty/20

Online banks have been steadily raising the annual percentage yield (APY) on their savings accounts to well over 2% in an effort to gain more customers. But that could be ending soon: With the Federal Reserve expected to cut interest rates, big online players, including Ally and Marcus by Goldman Sachs, are lowering their rates.

The dip is no need to panic, Greg McBride, chief financial analyst for Bankrate.com, tells CNBC Make It. The top online accounts are still offering 2.4% or more, well above the national average of 0.10%.

"It's still a good environment for savers," says McBride. "The fact is, we've seen lots of competition in recent months where the rates went up."

Still, the small drop in interest rates likely isn't worth going through the hassle of switching accounts from Ally or Marcus to a bank offering a higher APY. The rates on these savings accounts are variable, after all, and may go back up or potentially drop further.

You can lock in an APY with a CD, but you might not want to

For savers who want to avoid variable APYs, a certificate of deposit (CD) is another option. CDs lock in an interest rate that's typically higher than the average savings account — the average APY on one-year CDs is currently 0.64% — with a few catches.

For one, money deposited into a CD isn't as easily accessible as it is in a savings account: It's kept in the CD for a pre-determined period of time — say, three months, six months, a year or more — until it's "matured." And if it's withdrawn early, a penalty is applied, usually equivalent to a few months interest.

"Basically, a certificate of deposit offers a yield and has no risk," Jill Gonzalez, analyst at WalletHub, tells CNBC Make It. They are "a popular instrument among those who want to get a little extra on their cash and are willing to keep their money blocked until maturity."

If there's a chance that you might need to use the money in your CD, compare options and choose one with the lowest penalties. Personal finance site NerdWallet has a CD rate tool that can help consumers compare interest rates and the fees applied to early withdrawals.

The CDs that offer the highest APYs typically have higher minimum deposit requirements than, say, an Ally savings account, and they require longer periods of maturity. NerdWallet reports that the best CD rates to be had are also at online institutions and credit unions. As of writing, Discover offers a 5-year CD with a minimum balance of $2,500 and a APY of 2.85%, but you'll pay 18 months worth of interest if you need to withdraw funds early.

CD yields are also likely to fall ahead of a rate cut, McBride says. Banks don't want to be locked in to paying out a higher rate than they have to for longer than they have to.

And according to McBride, savers typically wouldn't be able to find an interest rate that's meaningfully more than what online savings accounts offer unless they opt for a four- or five-year CD. Otherwise, rates are comparable to online savings accounts, which are far more flexible.

"The appeal in CDs is still pretty limited," says McBride. "What's the point?"

Online accounts are ideal for emergency savings

McBride stresses that online savings accounts still offer the best rates, especially among all banks. And there are plenty of options besides Ally and Marcus. Wealthfront, a fintech company that provides automated investment options, recently increased the APY on its cash account to 2.57%, which is one of the highest rates in the country. Wealthfront is not a bank, but deposits into its cash accounts are held at partner banks, so they are still FDIC-insured.

According to Bankrate, Michigan-based Northpointe Bank currently offers a 2.55% rate on its high-yield account, but users need to have an account balance between $25,000 and $1,000,000 to qualify. Wealthfront, however, requires a minimum balance of $1, and Ally and Marcus do not have minimum deposit requirements.

High-yield savings accounts and some CDs work best for short-term and emergency savings that a saver might need to access in, say, the next five years, but still wants to earn a return on. For long-term and retirement savings, it's preferable to invest in low-cost, diversified index funds, which have historically yielded more than 2%.

Don't miss: 70% of Americans make this simple banking mistake—and it could cost them $50 billion

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Online savings accounts are cutting interest rates.
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