A CD or Certificate of Deposit is a product offered to consumers by financial companies like banks and credit unions.
A CD is similar to a savings account except it is a time deposit. This means your money will have to sit for a specific term, collecting interest, in the financial institution until it matures. At the end of the CD term you can withdraw your money plus the interest you accrued during the term of the CD. CDs are insured by the FDIC(Banks) and the NCUA(Credit Unions) which makes them pretty much risk-free. Being risk free makes them an extremely secure place for your money to sit and accrue interest, but with the high security comes low yields.
CD Terms usually come in 3 months, 6 months, 1 year, 2 years, 3 years or 5 years. The Interest rates on CD’s are usually fixed for the duration of the term and increase as the term gets longer. Meaning the longer the term the better interest you will make on the CD.
Why Choose a CD over a Standard Savings Account?
Financial institutions will pay higher interest on CD rates because your money will remain in the CD for the agreed upon term. In a typical savings account you can withdraw your money on demand. When your CD matures you will have accrued much more interest earnings then if your money sat in a standard savings account for the same duration.
Helpful CD Tips: (There are exceptions for everyone of these tips, but these are usually the case.)
- CD accounts with longer terms usually come with higher earning interest rates.
- CD accounts with a larger principle balance usually come with higher earning interest rates.
- Personal CD accounts usually have higher interest rates then Business CD accounts.
- Uninsured CD accounts usually have higher interest rates
- Small financial institutions usually offer higher interest rates then large financial institutions.
What are good CD Rates?
Determining what “Good” CD Rates are is all relative. If you compare to earlier this decade every CD rate today is bad. The 12 Month CD nearly hit 6% in the early 2000’s.
It is important to determine what CD Term you desire, then you can review your choices and find the best CD Rates.
Determining the Amount to Deposit into your CD account?
Many CD accounts require a minimum deposit. The higher the minimum deposit, usually, the higher the rate. If you have a substantial amount of money you will receive a better interest rate in a Jumbo CD account. Jumbo CD accounts typically require a deposit of $100,000 or more.
Some Banks and Credit Unions will allow you to have the interest earnings withdrawn monthly or bi-monthly, often times automatically deposited into a checking or savings account. They allow this because this eliminates compounding interest in the CD account. If you decide to leave your money in the CD account, you will not only earn interest on the original balance, but also earn interest on the interest earned from the CD account.
Early Withdraw Penalties
Early withdraw penalties are the check to make sure you do not remove your money from the CD account before the term has ended. The amount of penalties will differ depending on the size, term and type of CD account you opened. Financial institutions who offer insured CD accounts are required to disclose the penalty for early withdraw at the time the account is opened.