Bank Products — Certificates of Deposit

Certificates of Deposit (CDs)

If you have some money in savings that you know you won’t need to spend soon, a Certificate of Deposit (“CD”) might be a good savings option. With a CD you are committing to give your money to the bank for a set period of time and not touch it. Generally, the longer you agree to leave your money in the bank, the higher the interest rate you’ll earn. Like a savings accounts, CDs are a safe, FDIC insured way to help you grow your savings.

In most cases, your money will earn more interest in a CD than it will earn in a savings or money market deposit account. Unlike a regular savings or money market account, when you put your money into a CD, you’re signing up for a fixed rate for the entire term of the CD. The trade-off is the time commitment. To get the full benefit of the higher interest rate, you need to keep your money in the CD for the entire term you sign up for (until it “matures”), which could be anywhere from 3 months to 5 years. If you withdraw the money early, you’ll be subject to a penalty and could lose some or all of the interest it would otherwise earn.

How CDs work

Money saved in a CD with your bank is deposited for a certain amount of time, and earns interest until it matures.

Interest—Like savings accounts, CDs can earn compound interest as interest accumulates in the CD. This means that, although the interest rate percentage remains constant, the dollar amount of interest added increases each period. As an alternative to allowing the interest to stay in the CD, the CD purchaser can usually arrange to have the interest periodically mailed as a check or transferred into a checking or savings account. This reduces the total interest earned because there is no compounding. When shopping around for a CD, look for the Annual Percentage Yield (APY), which is the rate of return your CD will earn in a year, accounting for compounded interest. APY is different from Annual Percentage Rate (APR), which is the simple interest rate applied to every calculation of interest during the term of the CD.

Rates and Length of Term—Different interest rates will apply depending on the going rates at the bank you purchase from, and the length of the CD term. Generally, the longer you are willing to commit to leaving your money in a CD, the better the interest rate you will be able to get. For example, you might only get 1.0% interest for a one-year CD term, while the same bank also offers 3.0% interest on a five-year CD. Weigh the pros and cons of having your money tied up for a longer period of time, versus earning the additional interest.

Early Withdrawal Penalty—If you cash out a CD before it matures, you pay a penalty. Usually the penalty amounts to one or more months’ worth of interest the CD would have otherwise earned.

When Your CD Matures—When your CD “matures” or comes to the end of its original term, you usually have a window of time to decide what to do next (10-15 days in many cases). In some cases, banks can automatically reinvest the money into a new CD if you don’t give alternate instructions. Make sure you tell your bank what you’d like to do with the funds, unless you want the money rolled into a new CD.

Shop for the Best CD Rates—Interest rates on CDs vary from bank to bank. It pays to shop around for the best rate possible on a term length you are comfortable with.

  • Check local banks to see what current CD rates are being offered.
  • Go online. Sites like Bankrate.com offer lists of the best CD rates available according to how long you would like to keep your money in the CD.
  • See if your bank has affinity rates. Banks will usually offer their best CD rates to their best customers. Check to see if your bank will offer you a better rate on CDs for your good business.

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