Certificates of Deposit

Score A Certificate of Deposit Today! 

If you’re looking for an investment that protects your capital while giving you a higher return than traditional savings accounts, Certificates of Deposit (CDs) are a smart option. They are FDIC insured which means that your money is protected by the US Government up to $100,000. And they yield the highest interest rates of all bank savings programs.

But not all Certificates of Deposit are alike. You’ll find that terms and interest rates may vary, as well as early withdrawal penalties. Our BankSITETMDirectory will help you find a bank near you for more details. But first, be sure to take our One-Minute Certificate of Deposit Test to help you decide whether a short-, medium- or long-term CD will give you the advantages you’re looking for. Then, compare your test score to the chart below.


How CDs Work…

A Certificate of Deposit is a time deposit. When you purchase one, you are basically giving the bank the right to hold your money for a fixed period of time. In return, the bank gives you a higher rate of interest than you would normally get in a savings or money market account, where you may withdraw your money at any time. With a CD, there are generally stiff penalties for early withdrawal.

Like all savings accounts, your money is insured by the FDIC up to $100,000 per institution. As such, some individuals that invest more than $100,000 like to diversify their funds with several institutions.

CDs, however, are not entirely without risk. The risk comes from outside the investment itself as a result of the way interest rates change over time. For example, the interest rate of your CD is fixed for the duration of your investment. This gives you the ability to predict, and to some extent protect your return. If interest rates are dropping, locking money into a CD will shield you against lower interest rates. On the other hand, if interest rates are rising, locking yourself into a long term CD will prevent you from taking advantage of the additional revenues higher interest rates will produce.

Taking out a CD requires a minimum deposit. Most institutions offer a $500 Certificate of Deposit, however some banks will allow you to open a CD with as little as $250. And normally, banks offer a higher interest rate with a higher minimum deposit.

The day the term of your CD ends is called its “maturation date.” This can range from a few days to 10 or more years. You’re usually rewarded for choosing a longer term with a higher interest rate.

How your interest is paid to you differs from financial institution to financial institution. Some banks send you a check. Others deposit the money automatically into your account. How often interest is credited also varies. Some pay at regular intervals; others wait until the end of the term.

To make CDs more attractive and themselves more competitive, some banks offer variations on the traditional CD formula. These include: Add-on CDs,where you can add to your initial deposit; Early-withdrawal CDs, which allow you to withdraw part of your principal before the maturation date; and Upgradable CDs, where you can change the interest rate you’re paid to a higher rate.


Tips On Getting The Most From Your CDs

While the risk is low with Certificates of Deposit, you pay for that security with a lower rate of return than with some other forms of investment. So the wise investor placing money in CDs looks for ways to maximize the return.

Here are some investment tips that can help:

CD Tip #1: Choose the longest term you can afford. The longer the term, the higher the interest rate offered.

CD Tip #2: Allow interest to compound. Don’t spend your interest when you receive it. Let it build up and earn interest on the interest. If you invest $500 at 8%, for example, and allow the interest to compound, you’ll have more than doubled your money at the end of 10 years. You’ll have received $574 in interest alone over the 10 years. Take it out when you receive it and you’ll only receive $400 in interest over the 10 years.

CD Tip #3: Decide whether you anticipate that interest rates will be rising or falling. If you think they will rise, then keep your money in a short-term CD until rates reach a point where they are high enough to represent an attractive return for you. At that point, switch to a longer term. If you feel they will drop, protect yourself against lower interest rates by keeping your money in a long-term CD.

CD Tip #4: Ascertain your needs and goals. Do you need income? Now or later? How available does your money need to be? Plan your investing to meet those needs and goals.

CD Tip #5: Determine how much liquidity you need. Keep only the amount of money necessary to cover short term needs in a short-term CD. Keep the rest in longer term, higher interest CDs.

CD Tip #6: Define how much risk you are willing to take. CDs are low risk, but offer a lower return compared to other types of investments. Keep only the amount you need to shelter from risk in CDs.