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CD Rates Could Rise With Fed, But Watch Out for Fees

NEW YORK (TheStreet) -- A proposed interest rake hike from the Federal Reserve, as "predicted" by St. Louis Federal Reserve Chairman James Bullard last week, would be good news and bad news for Main Street consumers.

Bullard's comments to Fox News indicated a rate hike could occur as early as the first quarter of 2015.

"A rate hike by the Fed would be either positive or negative for consumers, depending upon whether they were investors or borrowers on net," says Michael Gorham, a business professor at the Illinois Institute of Technology. "The cost of any floating-rate borrowing, such as credit cards and adjustable rate mortgages, will go up. And the cost of getting into a fixed-rate loan, such as a fixed-rate mortgage, will rise while interest rates are rising, though once the contract is been signed the rate will remain the same for 20 years."

That's the downside. The upside should make bank investors happier.

"Investors will be delighted by the fact that their money-market funds and bank saving deposits will start to pay interest rates visibly greater than zero, and eventually longer-term Treasury and corporate bonds will also pay higher rates of coupon interest," Gorham adds. 

Also see: What Experts Expect from a Fed Rate Hike in Early '15

On the bank savings front, any upfront positioning on certificate of deposit rates should be handed delicately. Yes, you'll want to lock in the highest rates possible, but you don't want to hop around different CDs in that effort and threaten early withdrawal penalties.

It's highly likely that could happen. According to Bankrate.com's 2014 Early CD Withdrawal Penalties Survey, 90% of financial institutions will confiscate some of the principal if a customer makes an early withdrawal and the accrued interest is less than the required penalty.

Bankrate says the most common penalties are three months' interest for CDs with maturities of less than one year and six months' interest for CDs with maturities between one and five years. For a five-year CD, the most common penalty is a tie between six months' interest and 12 months' interest. 

Greg McBride, chief financial analyst at the company, says investors should plan ahead and calculate how much money they would lose with an early withdrawal,  comparing it with any profits made from dipping to a bank CD with a higher rate of return.

Also see: Did the Fed Bank Bailout Work After All?

"Investors look to CDs more for a return of their money than a return on their money, and early withdrawal penalties threaten the return of the investment they're trying to protect," McBride says. He advises watching out for the "steepest penalties" on CDs that mature in five years or less.

If Bullard is right and the Fed lifts rates early next year, that still gives you plenty of time to break out the calculator and measure potential fee penalties from flipping from an old CD to a new one that pays higher rates.

But don't let the clock tick for too long -- there's really no good reason you shouldn't benefit from higher bank rates. And taking care of business with your CD lineup can make sure you maximize that advantage and avoid early withdrawal fees as best you can.

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