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How to Find the Best Bank CDs

Comparing yields on certificates of deposit requires some work and know-how

Here's a belated New Year's resolution for 1997: If you are putting dollars into bank certificates of deposit, get the highest possible earnings on your money.

"Easy enough," you say. "Just go to a bank with the highest interest rates."

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Alas, if it were only that easy. Joseph Mintz, a former insurance agent in Dallas, has been leading a one-man crusade around the United States to get banks to provide more detail on interest earnings on CDs. And so far, Mr. Mintz has found that - whether because of incompetence, misrepresentation, or some other reason - many banks do not provide the accurate information consumers need when assessing competing offers from institutions.

In the past two or three years, Mintz has interviewed officials of 40 banks about interest earnings on CDs. In almost all cases, the information he has gotten has turned out to be incomplete or wrong, he says. Over time, the amounts could be off by thousands of dollars.

That's a significant problem, given that CDs are used by many small investors as a simple way to earn higher interest on their money than they could get from a money-market or savings account.

Robert Heady, publisher of Bank Rate Monitor, a Florida newsletter following bank savings and lending rates, says Americans have about $900 billion invested in CDs, plus another $1.3 trillion in lower-paying savings accounts.

CDs performed OK for investors in 1996. Mr. Heady reckons that in total return, they came in behind stocks and mutual funds, and well ahead of Treasury bills, US savings bonds, and gold. CDs should also prove relatively attractive in 1997, he says, especially should the return on stock and mutual funds shrink as expected.

By law, under federal truth-in-savings requirements, banks are required to provide customers with the annual percentage yield (APY) on their investment. The APY is a combination of the interest rate and compounding period of the account. In theory, by comparing differing APYs, investors should be able to determine their gain. Banks must disclose all possible penalties, such as loss of interest for early withdrawals. But banks are not required to provide additional details, such as the exact amount you will make. And APYs are based on one-year, not shorter or longer time frames. "Almost every time I ask a banker" for the specific earnings on a CD, "they either say they can't compute the figure or they won't be able to do so because their computers are not working, or something like that. Or they provide an amount, but the amount is wrong," Mintz says.

How important are the differences in interest rates and yields? Substantial. How your interest is compounded will give you sharply different returns. Suppose, Mintz says, you deposit $10,000 for one year at a rate of 8 percent, compounded annually. At the end of the year you will get back interest earnings of $800. But if you compound that amount quarterly, you get $824.20. If compounded monthly, you get back $830. If compounded daily, you get back $832.90.

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Moreover, even minuscule variations in interest rates can lead to sharp differences in returns. The same $10,000 with a yield of 6 percent over 10 years will produce a total return of $17,908, he says. But invested at just a quarter point additional yield, 6.25 percent, you will get $18,335, or another $427.

Mintz, who once took on the insurance industry for greater public disclosure of insurance costs to consumers, wants banks to provide consumers with the real dollar amount earned on CDs. Banking groups privately argue that doing so would take time and might be unintentionally misleading, given different penalty provisions, account time durations, and so forth. Moreover, some banks are concerned that if the expressed dollar payout was wrong, they might be financially liable.

But Mintz notes that while banks are reluctant to provide real dollar earnings for consumers, they demand nothing less than absolute specificity when lending money. In car leases or purchases and home mortgages, for example, banks invariably require borrowers to sign endless pages of documents spelling out all kinds of calculations down to the last penny showing what the borrower must pay back, including penalties that will be paid, says Mintz.

"Mintz is right on" in his approach, says Heady of Bank Rate Monitor. "You should be able to ask a banker what you will have in your account when the CD matures. If they can't tell you," he says, "take your business across the street."

Congress has been under pressure from some banks to soften or repeal federal truth-in-savings measures, which were first enacted in 1991. Prior to passage of that legislation, consumers were more or less "on their own" in assessing competing claims by banks, says Michelle Meier, government affairs counsel for the Consumers Union, an advocacy group in Washington. Late last year, lawmakers rolled back a major part of the legislation, she notes. A provision that consumers can get compensation for money lost by deceptive practices will be eliminated early next century.

Ms. Meier says that additional attempts to weaken the law - such as getting rid of the APY provision, as sought by some banks - is less likely in 1997.

Mintz has a small booklet designed to help keep your neighborhood banker mathematically alert: Called "Instant Yield Calculator," it lists 600 interest rate yields from 4 percent to 9.99 percent, plus time frames from one through 50 years. Even if your banker can't figure out what you can make on a CD, the booklet will show you the amount. Mintz carries it with him whenever he talks to a banker. The booklet is available through Instant Yield, Box 12066, Dallas, TX, 75225. Cost: $8.75.