Certificates of Deposit

Last updated: April 7, 2016

Learn More About Certificates of Deposit

A certificate of deposit (CD) is a relatively low-risk cash account alternative to a normal savings account. Banks and credit unions are the primary issuers of CDs. 

A CD offers you a higher interest rate than a savings account. Yet, unlike a savings account, the money has a maturity period. In other words, you invest a sum of money with a bank or credit union for a specified period of time. This could be anywhere from 21 days to 10 years (or longer). After the maturity period, you can withdraw the money with the extra accrued interest. However, if you redeem the CD early, you may be subject to an early withdrawal penalty and have to give up a part of the accrued interest.

There are many different types of interest rates for CDs:

  • fixed rate

  • variable rate

  • long-term

  • CDs with other special features

Be Smart When Selecting a CD

Choosing the certificate of deposit (CD) with the highest yield may not be appropriate for your financial goals. A low yield and short term CD may fit your situation better. Before you buy a CD make sure you understand the disclosure agreement and terms. Here are some tips for what to look for:

Know Your Financial Goals

Make sure you have made a financial plan. Can you afford more risky investments? What does your time table look like? How diverse is your portfolio? What does the current market look like? (In 2015 interest rates were so low that investing in a CD may not have been a good idea.) You may want to contact a professional financial adviser to help you make a financial plan.

Know When the CD Matures

You do not want to get caught thinking you can get your money back sooner. Ask for the maturity date in writing. Be sure to put it somewhere you will remember.

Learn What the Call Feature Are

Some CDs have call features. This means that the bank can cancel a CD prematurely. This usually happens if the increase in interest rates is not beneficial to the bank. They will return your money with any already accrued interest. However, it will not be the full amount you first thought you were getting. It is important to not confuse the maturity date and a call period. A bank may offer a “two-year non-callable” CD. This only means they cannot call the CD within two years. The CD may not mature in two years.

Know the Interest Rate and How It Will Be Paid Out

Every CD should come with a disclosure document. It should include the interest rate of your CD and what type of rate it has. Make sure you know how often the interest is added and how it will be paid out.

Learn if the Interest Rate Changes

If the CD is a variable-rate CD, know how and when the rate can change. Some rates change with time; others change according to the market.

Know the Penalties for Early Withdrawal

If you want to withdraw your money early, there will be penalties. Know what they are.