A certificate of deposit is a type of savings account that can offer higher interest rates than the majority of regular savings accounts if not all. A CD usually has a fixed interest rate and a fixed time period. This means that you cannot withdraw your money from the account until the end of the term. If you need to access your funds before the end of the term, you may have to pay a penalty.

What is a Certificate of Deposit?

A certificate of deposit (CD) is a type of savings account that offers a higher interest rate than a regular savings account. A CD usually has a fixed interest rate and a fixed time period. This means that you cannot withdraw your money from the account until the end of the term. Moreover, some of the best CD rates are only available if you agree to leave your money in the account for a set period of time, known as the “term.” On the other hand, if you need to access your funds before the end of the term, you may have to pay a penalty. 

Certificate of Deposit rates

The best CD rates tend to be offered by online banks and credit unions. That’s because these financial institutions have lower overhead costs than traditional brick-and-mortar banks. As a result, they can afford to offer higher interest rates on CDs. For example, Ally Bank currently offers some of the best CD rates available, with rates as high as 0.85% APY for a 12-month CD. In contrast, the average 12-month CD rate from a brick-and-mortar bank is currently only 0.29% APY. Hence, if you’re looking for the best CD rates, it’s worth considering an online bank or credit union.

Types of CDs

  • Standard CDs: These typically have terms ranging from three months to five years and can be opened with as little as $500. Standard CDs are, as you might assume, quite common.
  • Jumbo CDs: These have higher minimum deposit requirements (usually $100,000 or more) but often offer slightly higher interest rates than standard CDs.
  • No-penalty CDs: These allow you to withdraw your money without paying a penalty if you need to access your funds before the end of the term. However, no-penalty CDs typically have lower interest rates than standard CDs.
  • Bump-up CDs: These allow you to “bump up” the interest rate on your CD if rates rise during the term of your CD. However, bump-up CDs typically have lower initial interest rates than standard CDs.

How does a Certificate of Deposit work?

A certificate of deposit works by investing your money for a set period of time. In exchange for agreeing not to touch the money during that time, the bank or credit union agrees to pay you a higher interest rate than what you’d earn in a regular savings account. The term is the length of time you agree to keep your money in the account. CDs typically have terms ranging from a few months to several years. Now, the longer your term is, your interest rate will be higher. That’s because the bank or credit union can count on having use of your money for a longer period of time. When the term is up, you can cash in your CD and get your original investment plus any interest that has accrued. Or, you can renew the CD for another term at the current interest rate. If you choose to cash out early, you may have to pay a penalty, which is typically

The benefits of a CD

One of the main benefits of a CD is that it offers a higher interest rate than a regular savings account. This is because when you open a CD, you are agreeing to leave your money in the account for a set period of time. In exchange for this, the bank or credit union agrees to pay you a higher interest rate than what you’d earn in a regular savings account. The interest rate on a CD is usually fixed, meaning it doesn’t change for the length of the term. That makes CDs a good choice if you want to earn a higher rate and know you won’t need the money during that time. It also means you can predict how much interest you’ll earn on your investment. Another benefit of a CD is that it can help you save money. This is because when you open a CD, you are typically required to make a deposit of a certain amount of money. This can help you reach your savings goals because it forces you to put aside a set amount of money each month. Lastly, CDs are FDIC insured for up to $250,000 per depositor, which means your money is safe in the event that the bank or credit union fails.

The drawbacks of a CD

One of the main drawbacks of a CD is that you typically can’t access your money until the end of the term. This means you won’t be able to take advantage of any opportunities that may come up during that time. For example, if you have an emergency fund in a CD and you need to tap into it, you may have to pay a penalty. Another drawback of a CD is that if interest rates rise, you may be stuck earning the same rate on your CD. This is because the interest rate on a CD is typically fixed for the length of the term. Lastly, if you cash in your CD before the end of the term, you may have to pay a penalty. This is why it’s important to make sure you won’t need the money during the term before you open a CD.

How to Choose a Certificate of Deposit

When choosing a CD, there are a few things you should keep in mind. First, think about how long you’re willing to leave your money in the account. The longer your money spends in the account, the higher your rate will be. However, you won’t be able to access your money during that time. So if you think you may need to cash out early, you should choose a shorter term. Second, compare interest rates from different banks and credit unions. The interest rate is one of the most important factors to consider when choosing a CD. You should also compare the fees associated with each CD. Some banks and credit unions may charge monthly or annual fees, while others may not. Lastly, make sure the bank or credit union is FDIC insured. This will ensure your money is safe in the event that the bank or credit union fails.

In conclusion, a CD is a type of savings account that offers a higher interest rate in exchange for you agreeing to leave your money in the account for a set period of time. CDs can be a good choice if you want to earn a higher rate and know you won’t need the money during that time. However, if you think you may need to cash out early, you should choose a shorter term. When choosing a CD, be sure to compare interest rates and fees from different banks and credit unions. And make sure the bank or credit union is FDIC insured. This will ensure your money is safe in the event that the bank or credit union fails.