Certificates of Deposit (CDs)
CD – What are Certificates of Deposit?
Certificate of Deposits are popular with savers because they offer a higher annual percentage yield (APY) than a traditional savings account. An APY is how savers assess which account will earn the most interest on their deposit.
CDs or Savings Account?
Banks award higher APY to CDs than a traditional savings account based on the assumption you will stay with them for the long haul. If you aren’t planning on saving on the long term you should consider an alternative saving scheme – accessing money tied up in a CD before it matures will incur a penalty.
How do CD’s work?
Buying a CD could not be easier. Your bank or credit union will sell you a certificate of deposit once you have completed a simple application form and then simply transfer funds into your newly set up certificate of deposit.
Your CD will accumulate interest at certain time periods over the course of the plan. At which point you will have two options, to either spend it or reinvest it into another CD (always check certificate of deposit rates first). People serious about saving will always reinvest while others enjoy spending the return on their investment as soon as possible. As the investor what you do with your capital is ultimately your decision. If you do wish to reinvest you can start compounding the interest on your account. Compounding generates interest on the premium deposit as well as the interest, which in simple terms means you earn interest on the interest, much like the snowball effect.
Compounding is the catalyst behind a truly prosperous investment plan and is especially effective with a certificate of deposit.
On maturity, you have around 14 days to inform your bank what you would like to do next – spend or save. If you do not instruct your bank to the contrary, they will automatically reinvest your savings into another CD. If the money is burning a hole in your pocket you should not delay in informing your bank of your desire to cash in your investment.
Which is the best certificate of deposit?
Compare certificates of deposits with your objective in mind because the best CD is not always the one that pays the highest interest rate. Certificate of deposits with the best interest rates usually have longer maturities (time periods) whereas shorter maturities attract lower rates. Therefore choosing the best certificate of deposit account largely depends on how long you plan to invest in a particular account.
Banks reward customers for committing to long-term maturities, which is why they will happily give you the highest certificate of deposit interest rate. Having said that, for every rule there is an exception. If a bank believes current market interest rates are too high they will anticipate a drop sometime in the near future.
To accommodate this expected drop in interest rates, banks/credit unions will keep APYs on certificate of deposits relatively equal across both short and long-term plans.
Remember, it is the economy that dictates competitive interest rates not the banks.
Compare best CD rates
Firstly, we advise you use our certificate of deposit comparison tables for the best account on offer. Debts aim to save you time as well as money by putting the latest information at your fingertips. We also suggest you visit local banks and credit unions to see if there are any attractive deals. An institution that needs to get deposits on the books quickly advertise their best rates on website banner ads and in newspapers.
Online banks typically offer some of best deposit rates. With lower overheads than the downtown equivalent, online banks can pass their savings onto the consumer.
Finally, when shopping around try contacting a brokerage firm. As financial advisors have access to brokered CD’s – which are typically sold in larger blocks – many of them have the best CD rates. Note of caution however, exiting from a brokered CD before maturity can be expensive.
How to get the best Certificate Deposit interest rates
If you really want to get the best CD rates you must meet a minimum investment requirement. Banks and credit unions alike, tend to reward their best customers with the most lucrative deals. As your provider how much it would take to secure a higher rate and if you can afford it buy a CD with a high interest rate. You could also consider consolidating your business to fewer providers as a way of increasing your investment. One point to remember however, is to keep your accounts within FDIC insurance limits.
Certificate of Deposit disadvantages
Certificate of Deposits can be an extremely rewarding way for any investor to save money. It is important, however that you consider the disadvantages associate with CD before your rush out into the market place.
CD disadvantages
- 1. Your money is locked up in a CD
2. Cashing in your savings before maturity incurs a penalty (which varies depending on the provider)
3. CDs are low risk which could mean low reward
FDIC/NCUA Insurance
CDs offered by banks are covered by FDIC insurance while credit union CDs are covered by NCUA insurance. Always check any Certificate of Deposits you purchase has insurance (worth up to $100,000).
Make yourself at home in our Forum and find out what everyone else thinks about CDs in America. There is also our up-to-date News section for all the latest on personal finance. If you need help finding a provider or would like to review a company, please don’t go without checking out our A-Z directory.
