Certificates of deposit are the Swiss army knife of Wall Street — they have lots of handy uses. One creative way to leverage your CD investment is to use it as collateral to pay down a loan.
But is it a good idea to use a CD to pay down debt — and if so, what’s the best scenario to do so?
Let’s take a look under the hood.
First some basics. The Holy Grail in any loan payment campaign is to erase the interest payments on the debt — that’s why you want to pay a debt off as fast as you can in the first place.
Take credit cards. The average interest rate on a national credit card is about 14%
Compare that to the 1.5% yield on the average two-year certificate of deposit, based on this week’s BankingMyWay National CD Rate Tracker.
So if you’re nearing the end of your two-year CD maturity, you can use the money from that account to pay off a credit card burdened with a much higher interest rate.
Let’s say, for example, that you have a $1,000 credit card debt, at that average interest rate of 14%. By using your CD to pay the debt off, you’d save $140 in interest over the course of a year (ex: $1,000 x 14.0% - $140).
Of course, you’d lose interest you could have earned by plowing the money back into that two-year CD at 1.5%. At a $1,000 investment, we’re not talking a lot of dough, however ($15).