Higher-rate alternatives to CDs have safety, too

April 19, 1992|By Glenn Burkins | Glenn Burkins,Knight-Ridder News Service

Despite low interest rates, people are still flocking to certificates of deposit.

Why: Because most CDs are federally insured, and that makes them super-safe. In exchange for that safety, investors must accept lower rates.

But there are other interest-paying investments that, if used properly, will generate greater income without a lot of unnecessary risks.

Take Treasury securities. Like CDs, they are federally insured against default. Their underlying values may fluctuate, but that risk is erased if Treasuries are held until they mature.

Rates on Treasury securities are low now, too, but they generally pay more than CDs -- especially for longer-term bonds and notes.

Here's another example: Putting half of your money in T-bills and reinvested the dividends, then putting the other half in an "average-performing" Ginnie Mae fund would have yielded a 1991 total return of 9.65 percent, without ever going into the stock market. (T-bills earned a total return of about 5.2 percent in 1991, and Ginnie Mae mutual funds had an average total return of 14.1 percent.)

For some folks, safety is all-important, even if it means lower interest rates. But for those willing to accept a reasonable amount of risk, higher yields can be found.

Before venturing into deep waters, make sure you understand the products you would buy.

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Low rate for big spenders. Provident National Bank in Philadelphia has a new two-tiered credit card that it says will save consumers money. In reality, only the people who carry big balances will see any of that savings.

The card charges an adjustable interest rate -- the prime rate plus seven percentage points. That currently would give you a rate of about 13.5 percent.

But here's the catch: The lower rate applies only to balances over $1,500. In other words, your balance must top $1,500 before you see any savings. Cardholders with smaller amounts would be charged 17.99 percent.

A Provident official said the card was meant to reward the bank's "best credit-card customers," those who carry big balances. After all, that's one of the ways banks make money.

From the standpoint of consumers, it would have been better if Provident had applied the lower rate to balances under $1,500. That way, cardholders would have an extra incentive to reduce their debts.

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